RIYADH: Moody's Investors Service maintains a positive outlook for Saudi Arabia's banking sector, thanks to the country's economic diversification program.
The US-based credit rating agency said in its latest report that demand for credit for government-backed projects will improve lending performance and bring significant benefits to Saudi banks.
“The operating environment for banks will continue to be supported by strong momentum in the non-oil sector and benefit from the accelerated implementation of economic diversification policies,” Moody's said.
The report added that although the expected reversal of the interest rate cycle could put pressure on margins, loan growth and lower funding costs could cushion the impact of lower interest rates.
However, Moody's noted that Saudi financial institutions' high dependence on government deposits and the increase in market funding due to high credit growth remain sources of risk.
“Our positive outlook also represents the strengthening of the government's ability to support banks. Escalating geopolitical tensions and a significant decline in oil prices remain risks,” it added.
Giga Project to Promote Bank Corporate Credit
Moody's said that while ongoing mega-projects in Saudi Arabia supported by the Public Investment Fund will drive business credit growth, mortgages remain the main driver of credit demand on the consumer side.
Other factors that could lead to improved performance for Saudi banks include the creation of new sectors in the kingdom, including the secular tourism and entertainment industry.
“Faster implementation of Saudi Arabia’s Vision 2030 economic diversification projects will be a top priority for government spending in 2024, which is likely to exceed budget spending by 13 percent in 2023 and remain at a high level in coming years. “The strong momentum in the non-oil sector is expected to continue into 2024, with growth expected to exceed 5%,” the credit rating agency said.
Quality of loans that should be improved
Moody's noted that government-backed loans for low-risk projects support Saudi banks' asset quality.
The credit rating agency added that increased exposure to home loans, where most borrowers are public servants with stable jobs, will provide further support and reduce concentration risk.
The report forecasts that non-performing loans are expected to reach around 1.5% of total loans, supported by high quality of borrowers and rapid credit growth.
Moody's highlighted in its report that banks operating in Saudi Arabia have significant loss-absorbing capacity and have one of the highest capital adequacy ratios in the Middle East region.
The rating agency noted that the loss-absorbing capacity of these financial institutions is further supported by high loan loss provisions that exceed 100% of the existing inventory of non-performing loans.
Saudi banks achieve high profitability
According to the report, net profits of Saudi banks will significantly recover from 1.4% during the pandemic in 2020 due to the impact of rising interest rates, reaching 1.9% as of September 2023, before falling to tangible in 2024. It is expected to remain stable at 1.7% of bank assets. and rapid growth in lending.
“Lending facility expansion will continue to support Saudi banks' profits. However, margins may come under pressure as the interest rate cycle reverses. “This is because the prices of stocks are revised on a quarterly basis,'' Moody's said.
Furthermore, “Funding pressures in the system due to faster growth in loans than deposits have caused funding costs to rise more than fourfold since 2020. Loan loss provisioning costs remain low and Saudi We expect banks to maintain sound cost controls and high efficiency.”
In contrast, Saudi banks, which typically derive the majority of their funding from deposits, will be slightly more reliant on market funding over the next 12-18 months as credit demand remains strong. It is expected that
The report added that these financial institutions' dependence on deposits from governments and government-related institutions will continue to grow in the coming months.
Moody's noted that the Saudi government's ability to support failed banks has been strengthened.
“We assume that there is a high or very high likelihood that the government will support banks if they fail. This is based on the government's track record of timely intervention. Our positive outlook on government ratings is , indicating a potential increase in the government's ability to support banks in times of stress,'' Moody's said.
In its report, the credit rating agency gave positive outlooks to major Saudi banks, including Saudi National Bank, Riyadh Bank and Saudi Awal Bank, as well as Saudi Franci Bank, Alinma Bank and Al Jazeera Bank.
Other Saudi banks with positive outlooks include Arab National Bank, Saudi Investment Bank and Gulf International Bank.
Of the 11 commercial banks rated by Moody's, Al Rajhi Bank was the only one on the list with a stable outlook.
Meanwhile, in a separate report, Moody's upgraded the outlook for the UAE's banking sector from stable to positive on the back of growth in the non-oil economy and rising business confidence in the emirate.
The credit rating agency added that the UAE government is likely to support underperforming banks.
“The UAE government’s willingness and ability to support UAE banks remains strong, supported by the dominance of local banks in the domestic financial system, the centralized structure of the banking system, and the UAE government’s significant influence on most banks’ balance sheets. “We expect it to remain at very high levels,” Moody's said.
It added: “The UAE government has a track record of supporting banks in times of stress. Finally, the government's ability to provide support will also remain very strong, as indicated by the government's credit rating.”
The credit rating agency said the outlook for the banking sector in other countries in the Gulf Cooperation Council region, including Bahrain, Kuwait, Oman and Qatar, remained stable.
