Al Rajhi Capital expects Saudi banks’ asset quality to improve

The Saudi banking sector’s asset quality could improve gradually with improvement in crude oil price and government’s recent initiatives to support the SME sector, Al Rajhi Capital noted in its report on Wednesday, adding that optimism over banking stocks is likely to continue and pressure on loan book is expected to ease in Q3.

“NPLs have been up marginally over the quarters and we believe asset quality could improve gradually with improvement in oil price and government’s recent initiatives to support SME space,” the report said, adding that pressure on NPLs is likely to ease on the back of improving operating metrics of corporates and delayed debt maturity profile of corporate debt.

It said the Saudi banking sector continues to post improved quarterly net income, recording a new high of SAR12.6 billion in Q2 2018, up +11.6 percent yoy, adding that “Implementation of IFRS 9 is unlikely to provide any further noticeable impact on the books of the banks.”

“We expect loan growth to be weak but, with a gradual rise in the GDP (1.2 percent y-o-y in Q1 2018) amid rising oil revenues, business sentiments could improve,” the report added.

The balance sheet of the banks in the Kingdom remained robust as at June 2018, which is likely to support the sector in the event of any negative surprise arising on the economy front, it added.

Noting that valuations of the Saudi banks are in-line with the regional peers, the report added that “despite around 25 percent rise in overall banking index, the attractiveness of the Saudi banks remains, given the better ROE profile of the KSA banks as compared to its GCC peers.”