Fitch Ratings-London-September 25: Opportunities to grow lending for Saudi banks are limited by weak demand for credit. Fiscal tightening, low confidence levels and geo-political risks are all weighing on credit demand. In the meantime, banks continue to build capital and liquidity buffers for future growth Fitch Ratings says in a peer review.
The Long-Term Issuer Default Ratings (IDRs) of six of the 11 Fitch-rated Saudi banks are driven by probability of support from the Saudi authorities. This considers Saudi Arabia's strong ability to support given the government's strong financial flexibility, illustrated by large external buffers and recent record of accessing international debt capital markets.
The ratings also reflect a high propensity by the sovereign to support domestic banks as shown by a strong record of maintaining stability in the financial system. Fitch views the probability of support for domestic systemically important banks (D-SIBs) as extremely high.
Five of the 11 Fitch-rated Saudi banks have their IDRs driven by their standalone creditworthiness. Fitch assesses a bank's standalone creditworthiness through assigning a Viability Rating (VR). For Saudi banks, these range from 'a-' to 'bb+', with a weighted average of 'bbb+' (the highest in the Gulf Cooperation Council).
The challenging operating environment is making earnings growth more challenging, but profitability has been resilient due to strong franchises, rising interest rates and a favourable banking system structure, with only 13 domestically licenced banks for a country of over 30 million people. Positively, we do not believe banks are loosening underwriting standards to create growth.
Non-performing loans (NPLs) continue to grow. Fitch views all Stage 3 loans, as classified under IFRS 9, as impaired, which caused a large increase in NPLs for some banks in 1Q18. Even on a like-for-like basis, NPLs are gradually rising. However, both high loan loss reserve coverage and capital buffers for most banks provide sound protection against deterioration in asset quality.
We view the sector as well-capitalised, with a weighted average Fitch Core Capital (FCC) ratio of 17.8%, among the highest globally. Strong capital ratios reflect stiff regulatory requirements, low growth and still strong earnings. Capital growth would have been greater had it not been for increased distribution of capital to shareholders. Nevertheless, we believe high capital ratios are necessary due to high concentration levels.
The sector has built up strong liquidity buffers, which help manage unexpected shocks. The weighted average Liquidity Coverage Ratio (LCR) for rated banks at end-2017 was a high 208%, driven by large stocks of liquid assets representing over 20% of total assets. Strong liquidity helps to mitigate risk arising from funding concentrations.