In addition, we continue to see stable trends for both economic risk and industry risk. No ratings were affected by this review.
Of the factors contributing to our assessment of industry risk, we have revised downward our assessment of the institutional framework to intermediate risk from low risk. We now view Saudi Arabia’s regulatory framework as comparable with that of peers, having previously considered it more conservative in terms of limiting risk appetite in the sector. Over the past few years, the Saudi Arabian Monetary Authority (SAMA) has relaxed capital requirements for mortgage lending and increased the loan to value ratio in order to help more nationals become homeowners, which is a Vision 2030 objective. These changes have led to a significant increase in mortgage lending, a trend that we expect will continue over the next couple of years.
Under our base-case scenario, we expect Saudi banks’ cost of risk will increase, reaching an average of 1.2% – 1.4% in 2020 – 2021, up from 0.8% in 2019. This is because we anticipate an economic recession in 2020 due to a lower oil price and COVID-19-related restrictions. At the same time, we believe Saudi banks will have sufficient capacity to absorb this stress, despite a decline in net interest margins, which still compare well with those of most peers. Notwithstanding the expected decline in profitability, most Saudi banks will remain profitable in 2020 and 2021 under our base case scenario.
Our stable trend for economic risk remains largely contingent on our oil price assumptions and resumption of economic activity globally in third-quarter 2020 as pandemic-related restrictions are lifted. If the recession has a more significant effect on Saudi Arabia than we expect, or there is a significant delay in economic recovery, we may revise our assumptions.