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Why the big 5 Saudi banks will struggle to keep profits up in 2018

Profitability at the five largest Saudi banks could be pressured going into 2018 as lower government spending impacts negatively on economic growth, in turn dampening credit demand and weakening corporate and, to a lesser extent, consumer borrowers’ ability to repay debt, says credit rating agency Moody’s in a report published last week.

The banks covered in the report are National Commercial Bank, Al Rajhi Bank, Samba Financial Group, Riyad Bank and Banque Saudi Fransi.

“As the Saudi government reins in spending, we expect lending to slow and problem loans to rise. However, the big five banks will be able to use their pricing power to offset these pressures and keep profit steady over the coming 12 to 18 months,” says Ashraf Madani, Vice President, Senior Analyst at Moody’s.

Challenges vs opportunities

Moody’s report, NCB, Al Rajhi, Samba Financial Group, Riyad Bank, Banque Saudi Fransi: Large Saudi banks will protect their profits despite a tough business climate, says that 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.

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.

Subdued credit growth

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 two per cent, keeping credit growth subdued at approximately three per cent.

Al Rajhi best positioned

Meanwhile, Moody’s says 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.