Saudi banks outlook stable; profitability highest in Gulf: Moody’s

The outlook for Saudi Arabia's banking system is stable as the Kingdom’s economy is expected to return to growth this year, bolstered by higher public spending and other stimulus, Moody's Investors Service said in a report published on Wednesday.

Moody's expects the Saudi economy to grow by 1.3 percent this year, after contracting by 0.7 percent in 2017. This will lead to lending growth – driven by corporate and real estate lending – which is expected to increase by 4 percent in 2018.

"Recovering oil prices, record budget expenditure and government efforts to protect households from the impact of economic reforms will be the main drivers of credit demand in 2018 and 2019," said Olivier Panis, vice-president and senior credit officer at Moody's.

"While lending to corporates will recover only gradually, particularly in the construction, manufacturing and transport sectors, retail lending will remain supported by solid growth in mortgages."

Saudi banks’ profitability is expected to remain the highest in the Gulf Cooperation Council (GCC) region, the report said.

The ratings agency also expects stronger margins as rising interest, higher credit growth, higher fee income, and low operating costs outweigh rising provisions.

“Stable profitability and moderate loan growth will reinforce banks' already strong capital adequacy. Moody's expects an average tangible common equity (TCE) ratio of around 17.8 percent by the end of 2019, up from 16.8 percent in September 2017,” the report said.

However, Saudi banks' ratio of non-performing loans to gross loans is expected to marginally increase to around 2.5 percent in the next 12 to 18 months, from 1.8 percent as of December 2017, said Ashraf Madani, vice-president at Moody's.

Meanwhile, the Organization for Petroleum Exporting Countries' (OPEC) agreement to limit crude oil production until the end of 2018 will remain a headwind for Saudi Arabia, Moody’s said.