The outlook for Saudi's banking system remains stable as the Kingdom's economic activity and credit growth gets supported by the positive effects of high government spending and increased private-sector business activity, according to Moody's.

The key drivers of the outlook are a benign operating environment; low problem loan levels; strong loss-absorption capacity, underpinned by high capital buffers and solid profitability; and the sector's stable, low-cost deposit base and ample liquidity, said Moody's Investors Service in its new 'Banking System Outlook' published today.

However, Moody's warned that these system-wide strengths will remain counterbalanced by structural weaknesses - high loan and deposit concentrations and the financial opacity of certain family conglomerates - over the 12-18 month outlook period.

Moody's expects Saudi to have a real GDP growth of 6 per cent in 2012, one of the highest rates in the GCC. This, in turn, will drive a moderate improvement in the banks' asset quality, said the ratings agency.

Moody's expects problem loans (defined as loans overdue by 90 days) to gross loans to decline below the December 2011 level of 3 per cent.

However, Moody's says that asset quality remains exposed to event risks, due to the continued high, albeit declining, single-party exposures in the banks' loan books.

Over the outlook period, the corporate sector will also remain susceptible to vulnerabilities, including the relatively low transparency of family-owned conglomerates and the frequent intermingling of risky investment activities with operating activities that are typically more stable.

Moody's says that the prevalence of non-interest-bearing deposits and good operational efficiency will also continue to support Saudi banks' high profitability. As a result of their high profitability, Moody's expects that Saudi banks will continue to maintain robust internal capital-generation, allowing them to absorb substantial losses without eroding capital.-TradeArabia News Service