Rising interest rates will boost profitability of Saudi banks: Moody’s

The recent increase in interest rates by the Saudi Arabian Monetary Authority (SAMA) is credit positive for Saudi banks because it will support their profitability through higher net interest margins, Moody’s Investors Service said in a recent report.

On 26 September, SAMA had raised its key reverse repo rate by 25 basis points to 2.25 per cent, in step with the US rate increase owing to the Saudi riyal's peg to the US dollar.

“Saudi banks' assets have historically been more sensitive to interest rate changes than their liabilities, because a high proportion of the assets carry variable rates while a high proportion of the liabilities are non-interest bearing deposits,” the report said, adding, “We expect rising interest rates to support Saudi banks’ gross yield, which was 3.8 percent in the first six months of 2018, up from 3.1 percent in 2016.”

“We do not expect rising rates to create immediate upward pressure on interest expenses, given the modest recovery in credit growth (2 percent in the first half of 2018) and Saudi banks’ favourable funding profile,” it added.

Moody’s also expects the gap between Saudi banks’ lending rates and low cost of funding to continue to widen because rate hikes are likely to continue.

Nonetheless, Moody’s cautioned that although rising rates will provide a boost to banks’ profitability, further rate hikes are likely to weigh on the borrowing costs of corporates and households, and affect their debt servicing capacity.

“This in turn could result in higher asset risks for banks in the longer term, especially for cyclical industries with relatively high financial leverage and problem-loan formation, such as the construction and commerce sectors,” it maintained.