Moody's Cuts Outlook on Saudi Banks to Negative on Oil Slump

  • Saudi banks' NPLs seen climbing from 1.4% to 2.5% in 18 months
  • Banks loan growth to slow to 3%-5% in 2016 from 8% in 2015

Moody’s Investors Service changed its outlook for Saudi Arabia’s banks to negative from stable on the expectation that bad loans will rise over the next 12 to 18 months because of low oil prices and a decline in government spending.

Non-performing loans will rise to about 2.5 percent of total loans over the period, from a "very low average 1.4 percent in September 2015,” Olivier Panis, a vice president at the ratings firm, said in a statement on Wednesday. Banks will also remain exposed to loan defaults owing to their "persistently high single-party exposures," the analyst said.

Saudi Arabia’s economic growth will slow to 1.5 percent in 2016 and 2 percent in 2017, well below the 3.4 percent growth estimated for 2015 because of the impact of lower crude prices, according to Moody’s. Banks’ loan growth will slow to between 3 percent and 5 percent in 2016, from 8 percent in 2015 and 12 percent the previous year, it said.

Still, capital buffers of Saudi banks are likely to remain "solid," with the sector’s average tangible common equity ratio remaining stable at about 15.7 percent at the end of 2016, compared with 15.4 percent in September 2015, Moody’s said. Profitability is also likely to remain strong because of the banks’ lean cost structures and zero corporate tax, it said.

Expanding Base

"Tightening liquidity -- as public-sector deposit inflows and corporate profits moderate -- will likely expose banks to greater funding volatility in line with regional pressures," Khalid Howladar, a senior credit officer based in Dubai, said in the report. "However, we expect the local impact to be manageable and funding structures to remain relatively stable thanks to a broad and growing depositor base."

Saudi Arabia’s central bank does not think further measures to boost liquidity are necessary after increasing the loan to deposit ratio last month, Abdulaziz al-Furaih, Saudi Arabian Monetary Agency vice governor, told Al Riyadh newspaper. SAMA, as the central bank is known, told banks last month that they can lend the equivalent of 90 percent of their deposits, up from an earlier limit of 85 percent.

“The current situation is very stable and reassuring and we don’t think that we have reached a stage that forces us to use other options,” Al-Furaih was cited as telling the newspaper.

The world’s largest oil exporter is seeking to revive its economy and stimulate credit as the slump in oil revenue and government spending strain the banking system. The three-month Saudi Arabia Interbank rate rose to 1.77 percent on Wednesday, the highest in about seven years, according to data compiled by Bloomberg.

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