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Moody's revises outlook on Saudi banks

DUBAI, March 16, 2016

Moody's Investors Service has changed its outlook for the Saudi Arabian banking system to negative from stable, according to its latest outlook research report, published today.

The outlook reflects the rating agency's expectation that the persistently low oil prices and resultant government spending declines will ultimately weigh on the Saudi banking sector.

Moody's report, entitled "Banking System Outlook -- Saudi Arabia: Persistent Low Oil Prices and Public Spending Cuts Drive Negative Outlook" is an update to the markets and does not constitute a rating action.

"We expect the operating environment for Saudi banks to weaken over the next 12-18 months," says Olivier Panis, a Moody's vice president -- senior credit officer. "With the prospect of lower oil prices for longer and a 14 per cent reduction in public spending in 2016, we believe that the credit risks across the system are rising."

Moody's forecasts real GDP growth to slow to 1.5 per cent for 2016 and 2 per cent for 2017 (well below the 3.4 per cent growth of 2015) and for average oil prices to stay at $33 a barrel in 2016 and $38 in 2017.

As a result, the rating agency expects loan growth to slow down to between 3 per cent and 5 per cent for 2016, from 8 per cent in 2015 (and 12 per cent in 2014). Moody's also expects asset risk to rise as a result of the deteriorating operating environment.

"We expect non-performing loans to increase to around 2.5 per cent of total loans over our outlook horizon, from a very low average 1.4 per cent in September 2015 -- still lower than for most other Gulf countries," said Panis. "Banks will also continue to remain exposed to event risks stemming from
persistently high single-party exposures -- although we estimate that around 10 per cent -25 per cent of banks' top 20 loans are either to the government or wider public sector."

Capital buffers are likely to remain solid, in Moody's view, with the sector's average tangible common equity (TCE) ratio remaining broadly stable at around 15.7 per cent by the end of 2016, up from 15.4 per cent as of September 2015.

Profitability is also likely to remain strong, despite increased funding costs and loan-loss provisions, according to the rating agency due to the low cost of funding and the banks' lean cost structures and zero corporate tax rate.

"Tightening liquidity -- as public-sector deposit inflows and corporate profits moderate -- will likely expose banks to greater funding volatility in line with regional pressures." explained Khalid Howladar, a senior credit officer based in Dubai. "However, we expect the local impact to be manageable and funding structures to remain relatively stable thanks to a broad and growing depositor base," he said.

Moody's notes that deposits represented 90 per cent of Saudi banks' non-equity funding as of September 2015.

Although Moody's expects government support for the Saudi banking system to remain high, the rating agency notes there are signs that authorities' policy stance may evolve in line with global practices.

In addition, government support assumptions could be further challenged on the basis of fiscal pressure for the Saudi government, signaling a potential reduction of government capacity to support banks in case of need. - TradeArabia News Service




Tags: Saudi Arabia | banks | Moody's |

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