Large Saudi banks will protect their profits despite a tough business climate, said Moody’s in a new report, highlighting that lower government could dampen credit demand and weaken corporate and consumer borrowers' ability to repay debt.

The banks covered in the report are National Commercial Bank (LT bank deposits Stable A1, BCA baa1), Al Rajhi Bank (LT bank deposits A1 Stable, BCA a3), Samba Financial Group (LT bank deposits A1 Stable, BCA a2), Riyad Bank (LT bank deposits A2 Stable, BCA baa1), and Banque Saudi Fransi (LT bank deposits A1 Stable, BCA a3).

"As the Saudi government reins in spending, we expect lending to slow and problem loans to rise. However, the big-5 banks will be able to use their pricing power to offset these pressures and keep profit steady over the coming 12 to 18 months," said Ashraf Madani, vice president -- senior analyst at Moody's.

Moody's says that Al Rajhi is best-positioned to maintain its profitability over the coming quarters, reflecting its strong retail-focus, with only limited, albeit expanding, corporate sector exposures; as well as its large Islamic franchise and low cost retail deposit base.

Rising interest rates will offset the impact on banks' profitability of higher provisions and lower fees and commissions, allowing them to reprice floating-rate corporate loans and achieve higher returns on their investment portfolios, as reflected in Riyad Bank's strong increase in net interest income in Q1 2017, despite negative growth in total earning assets.

Credit growth will be muted, with most banks already reporting flat or negative lending growth, with the exception of Al Rajhi. Non-oil GDP, a key driver of banks' business activity, will grow by just 2 per cent, keeping credit growth subdued at around 3 per cent.

Provisioning costs will rise and fee income will fall as the economy slows, with corporate-focused lenders, Samba, BSF, Riyad Bank and to a lesser extent NCB being more vulnerable, as their clients are exposed to reduced government spending on infrastructure and construction projects. Lower fees, commissions and foreign exchange (FX) income is being driven by lower trade and FX volumes. NCB is outperforming its peers through its ability to protect and grow its foreign exchange business.

All five banks have ample liquidity and strong capital buffers, with all banks reporting Tier 1 capital ratios above 15 per cent. These capital levels by far surpass the minimum regulatory ratio of 8.5 per cent and provide the banks with high loss-absorption capacity. – TradeArabia News Service