Saudi commercial banks continue to rank among the world’s most profitable banks, said Standard & Poor’s Ratings Services in a report published on Friday titled “Solid Profits and Prudent Strategies Help Cushion Saudi Banks against Pockets of Risk.”
“Through a unique combination of supportive features, the Saudi banks we rate continue to demonstrate their ability to generate solid, sustainable core earnings, in turn fuelling high profits,” said Standard & Poor’s credit analyst Nicolas Hardy. “Prospects for sound earnings and profits are bright.”
These banks operate in a potentially volatile but favorable environment, with high oil prices and vast spending plans under the aegis of the Saudi government, AA-/Stable/A-1+. Some key structural features of the Saudi banking system also explain the banks’ solid performance including low cost of funding; good pricing power; high efficiency, and a tax-free environment.
In our opinion, S&P said, the poor performance of international financial markets since 2008, local credit events in 2009, and prudential initiatives introduced by the regulator, the Saudi Monetary Agency (SAMA), have led the banks to revise their strategies in favor of plain vanilla domestic banking activities, and to strengthen their risk management practices.
“They have allocated their robust operating revenues both to build up capital positions and to increase provisions for coverage of bad loans to conservative levels above 100 per cent. From a rating perspective, these cushions and the banks’ resilient revenue generation underpin their credit quality, in our view enabling them to face both expected and unexpected losses.”
“Apart from geopolitical risks and the challenges associated with operating in a potentially volatile economic environment, concentration risk in corporate loan books remains the main risk that the Saudi banks face, in our opinion,” the report said.
“We do not foresee a general deterioration of asset quality in the near future. Because of the prolonged low interest rates, these banks have streamlined their existing sources of noninterest revenues. Consequently, the banks appear well-positioned to capture growth opportunities in the developing local retail and corporate segments and continue to post solid profits.”