Stable outlook for Saudi banks, says Moody’s

The outlook for the Saudi banking system is stable, reflecting its resilience and strong financial fundamentals despite the continued challenging operating conditions, Moody's Investors Service said in its annual banking outlook on Saudi Arabia.
"The current and historically strong financial fundamentals highlight Saudi banking system's resilience during a period when operating conditions have been challenging," said Christos Theofilou, Moody's lead analyst for Saudi banks. This resilience is supported by the government's fiscal stimulus, which has sustained macroeconomic growth, the banks' robust financial fundamentals, including strong liquidity, and adequate profitability and capitalization, as well as a prudent regulatory environment.
However, Moody's said that the low interest rate environment is exerting pressure on the banks' profitability through reduced margins and lower business growth.
"Catalysts for potentially greater lending activity could include the banks' strong liquidity and expectations of a peak in provisioning levels, in conjunction with banks' efforts to maintain market share and margins in the current low-interest/low-growth environment," Theofilou explained.
There are indications of a pick-up in loans to the private sector, with a healthy pipeline of projects expected over the next 18 months. Overall, Moody's expects the banks' 2010/2011 net income to be modestly higher than over the past two years, mainly because of expected lower provisioning charges.
As regards asset quality, non-performing loans (NPLs) should remain close to current levels, as the family dispute between AH Algosaibi & Brothers (AHAB) and Saad Group is not expected to be settled in the near term and private sector loan quality is expected to stabilise.
The rated Saudi banks' limited geographical diversification continues to weigh negatively on Moody's assessment of the banks' overall franchise value as they remain vulnerable to an economy that is still largely dependent on oil. While opportunities for franchise growth were limited over the past two years, Saudi banks' initiatives to penetrate the retail banking market and expand their Shari'ah-compliant products have strengthened their business franchises and market positions.
While the banks remain sufficiently liquid and funded by "sticky" local deposits and their profile reduces market funding-related vulnerabilities, challenges include high concentrations in deposits and mismatches in the maturity profiles of assets and liabilities.
Finally, geopolitical instability and security threats remain potential areas of concern, as do the economy's continued limited diversification beyond the hydrocarbons sector and the volatility in the country's real and nominal output.