NBK Capital lowered its fair value estimates on four Saudi banks, and said the fear of weakening asset quality had emerged as the top concern for the banking sector in the current period.

The financial trouble of two major Saudi groups brought more attention to the weakening asset quality and further increased fears regarding a significant deterioration, analyst Raja Ghoussoub said in a note dated September 17.

The two family conglomerates Saad Group and Ahmad Hamad Algosaibi and Bros (AHAB) are restructuring billions of dollars of debts after defaults which have posed the Saudi banking sector with its biggest challenge in decades.

We believe the situation is still unclear regarding how this issue will unfold and to what extent Saudi banks will be affected, said Ghoussoub. The analyst added that the biggest unknown in the second half of the year will be provisioning, which he assumes will increase compared with the first half.

However, the analyst said he maintains his favourable view on the Saudi banking sector, despite cutting the fair value estimates.

'The sector enjoys abundant liquidity and adequate and improving capitalisation,' the analyst said.

The analyst said Riyad Bank, Saudi Arabia's third-largest lender by market value, was his top pick, and raised his fair value estimate on the lender as it had the highest capital adequacy ratio among its peers and one of the best liquidity positions.-Reuters