Ratings agency Moody's said the outlook for Saudi Arabia's banking system in 2012 is stable due in part to high capital ratios and an expected decline in problem loan levels which will help boost profitability.

Banks in the world's top oil exporter are also set to benefit from strong economic growth and more liquidity underpinned by government spending, it said in a report on Monday.

Increasing state reliance on high oil revenue and a lack of corporate transparency pose risks over the longer term.

'We expect asset quality to improve slightly, with problem loans declining and provisioning coverage strengthening,' the ratings agency said.

It forecast problem loans - those overdue by 90 days - would fall to 2.5 per cent to 3 per cent of gross loans, compared to 3.5 per cent at the end of last year.

'Despite this we also expect that asset quality will remain exposed to event risks, owing to continued high, albeit declining, single-party exposures in the loan book and corporate sector vulnerabilities, including the relatively low transparency of family-owned businesses,' it said.

Saudi banks were forced to take big provisions in the aftermath of the 2009 debt implosion of two Saudi family firms.

The companies, Saad Group and Ahmad Hamad Algosaibi & Bros., have been locked in a complex legal dispute involving some $22 billion in debt, leading to banks across the region and overseas  booking provisions against their exposure.

Moody's forecasts non-oil private-sector gross domestic product to rise by 4.8 per cent in 2011 and 5.2 per cent in 2012, as the Middle East's largest economy has little government debt and substantial reserves.

Rated banks Tier 1 capital levels of 15.1 percent at the end of June look set to stay stable, said the agency, providing a buffer against any potential losses.

Meanwhile the ratio of loans to deposits fell to 74 per cent at the end of September from a high of 83 per cent during the financial crisis at the end of 2008, while liquid assets accounted for 38 per cent of total assets in September.

However, banks' assets are vulnerable to any sustained fall in oil prices and risks from 'investment activities that are often intermingled with operating activities.'

Its Aa3 sovereign rating for Saudi Arabia is also stable.-Reuters