Nomura says Saudi banks resilient to downturn - paper

International brokerage house Nomura believes that Saudi Arabian banks are resilient to the global economic downturn due to the relative strength of the region, solid fundamentals and a conservative regulatory environment, according to a report.

Nomura began coverage of the Saudi banking sector with a positive outlook, the Saudi Gazette daily reported on Saturday.

Saudi banks are an attractive way of taking advantage of a rising interest rate environment, Nomura said.

Owing to their high share of demand deposits and free funds, they should see their profits bolstered in the rising rate environment, it added.

The Saudi Gazette quoted Nomura as saying: “We believe banks’ high profitability should also derive from strong lending activity – thanks to government spending and retail/Islamic banking.”

In the short term, government’s infrastructure spending would be the main catalyst for a pickup in corporate lending volume growth, Nomura said.

Saudi Arabia has pledged to spend $400bn until 2013 to upgrade its infrastructure and has also launched a plan to build five economic and industrial cities to create new jobs, the Saudi daily noted.

“We believe Saudi banks should capture at least part of this large stimulus package by financing contractors,” Nomura said. In the mid-term, retail and Islamic banking would be the main drivers of balance sheet expansions, Nomura said.

The Japanese firm added that while the banks have curtailed risks in their investment securities, asset-quality deterioration due to ‘name lending’ (the practice of granting loans based mainly on clients’ reputations) may hurt their profits and partially offset top-line expansion.

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