Moody’s raises outlook on Saudi banks to stable

Moody's Investors Service revised its outlook for Saudi Arabia’s banking system, raising it to stable from negative to reflect the kingdom’s high risk-absorption buffers and easing funding pressures.

Saudi banks' credit profiles are expected to remain broadly stable over the next 12 to 18 months, the ratings agency said in a statement on Wednesday.

"Despite low oil prices, which we expect to fluctuate between $40 and $60 a barrel over the next 18 months, and cuts in oil production, the Saudi economy will gradually recover, supported by government spending,” Olivier Panis, vice-president at Moody's, said in the statement.

“As a result Saudi banks' liquidity and funding conditions will improve,” he added.

While profitability and loan performance in the country is likely to continue to soften, Saudi banks will maintain robust capital and loss absorption buffers compared to regional and international peers over the outlook horizon, according to Panis.

Moody’s also expects the operating environment for Saudi banks to recover as increased government spending and projects will support a gradual recovery of the non-oil economy.

The kingdom’s non-oil economy is expected to grow by 2 percent in 2017, versus 0.2 percent in 2016.

Real GDP growth, however, is projected to contract by 0.2 percent this year.

Credit growth is likely to remain low at 3 percent in 2017, but to gradually pick up from 2018, the agency added.

Non-performing loans (NPLs) are forecast to increase to 2.5 percent of gross loans, from 1.4 percent as of September 2016.

“Banks will maintain a solid operating performance, although subdued loan growth, rising provisioning charges and lower fee and commission income will weigh on profits,” Moody’s said, adding that the impact will be partly offset by stable margins, low operating costs and easing pressure on funding costs.

Access to funding is expected to improve, owing to liquidity injections from international sovereign debt issuances along with the clearing of overdue payments to contractors by the government.

Deposit growth, however, will remain low until economic activity picks up more materially in 2018, the agency noted.

Moody's said it expects Saudi authorities' willingness and capacity to provide financial support to the local banks to remain high, but the policy stance of the Saudi authorities may evolve as the regulator is contemplating the adoption of the Financial Stability Board's best practice on the resolution of distressed banks.