With the projection of economic growth of 5.9% this year, the banking sector of Saudi Arabia is stable, indicating that it has limited expectations of changes in the banks’ long-term issuer default ratings (IDRs) in the near to medium term, according to Fitch.
The IDRs of seven of the ten Saudi banks rated by Fitch are driven by expected support, if needed, from the Saudi sovereign (‘AA-‘/Stable). Consequently, their Outlooks mirror that of the sovereign and would only change should Fitch change its opinion on the propensity of sovereign support.
The stable outlooks on the remaining banks, with IDRs driven by their standalone strength, reflect the institutions’ sound capitalisation, improving asset quality and strong funding profiles. A revision of their Outlooks could be triggered by a marked deterioration in asset quality, the funding profile or capitalisation. Fitch considers these scenarios unlikely.
Fitch expects Saudi Arabia’s economy to expand by 5.9% in 2011. Two substantial spending packages announced by the king should further stimulate the economy. Together with the mortgage law, which is nearing ratification, this should create additional business opportunities for Saudi banks.
Resilient margins, moderating loan impairment charges and continuously strong cost efficiency should support profitability in 2011. At the same time, the low interest-rate environment, subdued credit growth and intense competition will constrain profit growth. As the best opportunities are perceived to lie in retail banking, Saudi banks are making greater efforts to develop their shares in this segment.
Fitch expects liquidity, funding and capitalisation to remain key strengths of Saudi banks. Liquidity is supported by moderate loan/deposit ratios and sizeable liquidity portfolios. None of the Saudi banks is dependent on market funding and, with an average Fitch core capital ratio of 17% at end-2010, they are well capitalised.
Key risks for Saudi banks continue to be their high concentrations on both sides of the balance sheet. Since political instability has started sweeping much of the Middle East and North Africa region, political risk has also increased, but Fitch does not expect to see unrest in Saudi Arabia.