Saudi banks to see 'modest' recovery on higher oil prices: BMI

Saudi Arabia’s commercial banking sector will experience a "modest" recovery in 2018, and beyond, on the back of an improving macroeconomic environment, BMI Research said in a recent report.

"The concomitant uptick in deposits will enable banks to expand their asset bases without posing risks to sector stability, which will also be supported by strong asset quality and capital adequacy," the research consultancy said.

"Rising oil prices will boost confidence in the economy, which will in turn support demand for consumer credit while encouraging businesses to gradually resume expansion plans," it added.

The Saudi government will remain a key source of asset growth, as it continues to borrow from domestic banks to fund its budget deficits, while credit demand from the private sector will pick up as business and consumer confidence improves.

BMI forecasts asset growth to accelerate from 2.2 percent in 2017 to 3.5 percent in 2018 and 4.0 percent in 2019.

"Steady deposit growth, robust capital adequacy and strong asset quality will support overall sector stability," it added.

While the slump in oil prices since the second half of 2014 resulted in a modest deterioration in loan repayment, the consultancy remains broadly optimistic over asset quality in the Kingdom.

The country’s non-performing loans (NPL) ratio has modestly increased from 1.1 percent in 2014 to 1.6 percent in 2017, as businesses and consumers come under pressure owing to the deterioration in the macroeconomic environment.

Saudi Arabia’s NPL ratio remains low by global standards and is one of the lowest in the region.

"Given our expectations for economic activity to pick up in 2018 and the following years, we do not expect further significant deterioration in asset quality," the report said.

Meanwhile, Saudi banks have limited exposure to currency risks, with foreign assets accounting for a mere 10.5 percent of the total and foreign liabilities for 4.1 percent of the total in 2017.

Coupled with the Saudi riyal being pegged to the US dollar and therefore fixed to other GCC currencies, foreign currency exposure is “very limited”, the report said.

The loan-to-deposit ratio fell modestly from 86.9 percent in 2016 to 86.1 percent in 2017 due to a slowdown in deposit growth resulting from the slump in oil prices.

BMI expects the trend will continue over the coming years as deposits outpace loans.

The slowdown in deposit growth has been partially compensated for by an increase in banks’ capital and reserves, which expanded from 13.5 percent of total liabilities in 2014 to 15.7 percent in 2017.

Meanwhile, the tier 1 capital adequacy ratio stood at 18.3 percent in 2017, having shown steady gains in recent years and well above the regulatory requirement of 10.5 percent.

The recent stress tests performed by Saudi Arabian Monetary Authority (SAMA) and the International Monetary Fund showed that the country’s largest banks are able to withstand external shocks, including a renewed slump in oil prices, the report said.

Additionally, Saudi foreign reserves stood at $497 billion at the end of 2017, representing more than 30 months of import cover. 

“Coupled with our expectations for further gains in oil prices over the coming quarters, the government’s ability to support the banking sector in the event of a crisis will remain strong,” BMI noted.