Fitch: Saudi Banks' 2007 results down, but outlook promising

However, the sector's outlook remains promising due to expanding private sector credit volumes and sustainable revenue growth under buoyant economic conditions.

'The banks are expected to show improving profitability in 2008, as high oil prices and the government's substantial investments in projects will drive economic expansion and asset growth,' says Mahin Dissanayake, Associate Director in Fitch's Financial Institutions team.

'However, asset quality, although broadly sound, is a concern, as there are real signs of deterioration, especially in the retail segment. This issue is exacerbated by the recent, fast growth in credit cards and real estate, as both sectors, like consumer finance, remain untested in an economic downturn,' he added.

Credit risk from investments in US sub-prime and structured investments is low, in the agency's opinion. A few banks had relatively modest exposures to problem CDOs and SIVs; these have since been provisioned or marked down with limited impact on profitability and equity.

The global credit turmoil has resulted in some Saudi banks delaying new debt issues as spreads widen; this has not caused any funding pressure, as banks remain comfortably funded by customer deposits. However, the higher cost of funding and pressure on margins are concerns. Banks have ample liquidity, supported by stable deposits, substantial liquid asset balances and supportive shareholders. Capitalisation is high and the agency expects a modest reduction in year-end ratios following the implementation of Basel II in January 2008.

Saudi economic risk remains moderate, although rising inflation could, in the agency's opinion, have negative implications on consumer spending, private sector investment, asset growth and loan repayments. Other sector challenges include the Saudi Arabian Monetary Agency's restrictions on consumer loans, increasing competition from new foreign entrants and the effects of the continuing international credit turmoil in the local market.