Riyadh: The Saudi banking sector saw a decline in interest expenses by 12.5% year-on-year, and 2% quarter-on-quarter.
This reflects improving funding conditions in Saudi Arabia after significant tightening in 2016, according to a recent report by Moody’s Investors Services.
Improving liquidity and funding conditions since 2017 have narrowed the Saudi Arabian Interbank Offered Rate’s (SAIBOR) spread against US dollar-denominated London Interbank Offered Rate, even reaching negative spreads in March 2018, despite a number of rate hikes by the US Federal Reserve, the report noted.
Since April 2018, the SAIBOR has risen to around 2.4%, its highest level since 2009, following a decision by the Saudi Arabian Monetary Authority (SAMA) to increase its repo rate in response to a decline of Saudi money rates below US rates.
The ratings agency doesn’t expect that this increase will create immediate upward pressure on interest expenses given limited credit growth and Saudi banks’ favorable funding profile.
Saudi banks have an average net-loans-to-deposits ratio of 83% and more than 60% of their liabilities were in noninterest-bearing deposits as of March 2018.
Moody’s expects interest income generation to remain challenged given subdued lending activity, somewhat balanced by higher returns on investment portfolios and the gradual re-pricing of variable-rate assets.
The report was published after the announcement of the financial results of Riyad Bank, which Moody’s said are credit positive for Saudi banks because the improvement occurred amid subdued economic activity that negatively affected credit demand, which resulted in a decrease in loans.