Wednesday, Dec 07, 2011
EDITED PRESS RELEASE
DUBAI--The outlook for the Saudi Arabian banking system remains stable based on the country's benign operating environment, the expected decline in problem loan levels, as well as Saudi banks' supportive capital , profitability and liquidity attributes, says Moody's Investors Service in a new Banking System Outlook published today.
The rating agency says that these positive factors are counterbalanced by structural weaknesses that include high loan and deposit concentrations, the opacity of family conglomerates and a vulnerability to a sustained drop in oil prices.
Moody's outlook expresses its expectations for the fundamental credit conditions in the Saudi Arabian banking system over the next 12-18 months.
The rating agency believes that the performance of the Saudi Arabian banking system will be supported by the expansion of non-oil private sector GDP, which Moody's expects will rise by 4.8% in 2011 and 5.2% in 2012.
The banks' performance will also benefit from continued high levels of government spending and resilience to oil price fluctuations over the outlook period as a result of low government debt levels and a large accumulation of reserves.
However, beyond the outlook horizon, the trend of a rising breakeven oil price in the country's budget will increase the vulnerability of the country - and therefore also that of the banking system - to a sustained drop in oil prices.
As a consequence of the benign operating environment, Moody's expects asset quality to improve slightly, with declining problem loans (to 2.5-3.0% of gross loans over the outlook period, down from 3.5% at the end of 2010) and strengthening provisioning coverage.
Despite these improvements, Moody's also expects that asset quality will remain exposed to (1) event risks, owing to continued high, albeit declining, single-party exposures in the loan book; as well as to (2) corporate sector vulnerabilities, including the relatively low transparency of family-owned businesses and investment activities that are often intermingled with operating activities.
In Moody's opinion, Saudi banks continue to be profitable, supported by the prevalence of non-interest-bearing deposits, allowing the banks to absorb substantial losses without eroding capital.
Going forward, the rating agency expects bottom-line profitability to strengthen, based on the expectations of lower provisioning requirements, although the low interest-rate environment and moderate private sector growth will weigh on pre-provision income.
Moody's also expects rated banks' capitalisation levels - with a Tier 1 ratio of 15.1% at the end of June 2011 - to remain close to current levels over the outlook horizon. Capital levels and recurring earnings provide an adequate buffer against losses, even under Moody's highly adverse scenario, with Tier I capital ratio declining to a still solid 11.7%.
The stable outlook for the Saudi Arabian banking system is further supported by the increasing level of deposit funding and liquidity, underpinned by the cash-rich Saudi government. Net loans to customer deposits for the rated Saudi banks declined to around 74% at the end of September 2011 from around 83% at the end of 2008 because of muted loan growth and high domestic liquidity.
While Moody's expects high deposit concentrations to remain a structural challenge, the rating agency also anticipates that banks will continue to maintain a comfortable level of liquid assets to total assets, which amounted to 38% as of September 2011.
In line with the stable banking system outlook, Moody's outlooks on the ten rated Saudi banks are also stable, reflecting overall benign operating conditions and sound financial fundamentals for most banks. The outlook on Moody's Aa3 sovereign rating for Saudi Arabia is also stable.
Moody's report, entitled "Banking System Outlook: Saudi Arabia", is available on www.moodys.com
-By Dubai Bureau, Dow Jones Newswires; +9714 446-1686; djnews.dubai@dowjones.com
Copyright (c) 2011 Dow Jones & Co.
(END) Dow Jones Newswires
07-12-11 0423GMT
