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Fitch: Saudi Banking Outlook under Pressure

From Tougher Operating Environment

Fitch Ratings says in a new special report that the tougher domestic operating environment is putting pressure on the Saudi banking sector outlook.

The performance and financial metrics of the Saudi banks remained sound in 1H15, driven by business growth and lower impairment charges. However, prospects for Saudi Arabia’s economy are under pressure due to the effect of lower oil prices on government spending and the knock-on effect on the rest of the economy.

Fitch expects the tougher economic environment to continue for at least the next two years and this will start to put pressure on the solid standalone bank ratings in Saudi Arabia and could act as a cap on these ratings. Fitch forecasts real GDP growth to slow to 3.5% in 2015 and to 2.4% in 2016 and 2017 (2014: 3.6%), mainly due to lower oil prices.

Fitch calculated loan book growth slowed to an annualised 8.8% in 1H15, compared with 13.5% in 2014, and forecasts 9% for the full year. We expect credit growth to remain at 7% to 8% in 2016.

Despite strong asset growth, the Saudi banks continue to be well-capitalised, with an average Fitch core capital ratio of 16% at end-1H15, a trend which we expect to continue, in light of expected lower loan growth.

Asset quality metrics are generally strong, but are likely to feel pressure over the next two years. Slower loan growth will mean that the loan portfolios start to season more quickly. Fitch expects banks to tighten underwriting standards, particularly in more stressed segments, such as contracting and construction, but also retail. High borrower and sector concentrations remain, which expose the banks to event risk.

Funding benefits from strong access to low-cost non-commission-bearing deposits, which help alleviate margin pressure on banks. Customer deposits remain short-term, but are behaviourally sticky. Loan/deposit ratios in Saudi are among the best in the region. Liquidity is expected to tighten slightly in 2016, with marginally less government-related deposits in the banks and an increase in deposit pricing. The banks also benefit from large volumes of liquid assets.

The Long-term Issuer Default Ratings (IDRs) of The National Commercial Bank, Al Rajhi Bank, Riyad Bank, SAMBA Financial Group, Bank Aljazira, The Saudi Investment Bank, Saudi Hollandi Bank and Alinma Bank (ie, eight of the 11 Saudi banks rated by Fitch) are driven by expected support, if required, from the Saudi sovereign (AA/Negative/F1+).

The IDRs of Banque Saudi Fransi, Arab National Bank and Saudi British Bank are driven by their standalone strengths as expressed by their Viability Ratings.