By Andy Sambidge
Ratings agency says Saudi Arabia's strong macroeconomic outlook will continue to drive opportunities for banks
Saudi Arabia's strong macroeconomic outlook will continue to drive business opportunities for banks operating in the Gulf kingdom in 2015, Fitch Ratings has said in a new report.
The ratings agency said that high public sector spending will result in Saudi banks being able to reduce its loan impairment charges.
"The performance of Saudi banks remained sound in H1 2014, driven by business growth and declining loan impairment charges," said Redmond Ramsdale, director in Fitch's Financial Institutions team.
"The prospects for Saudi Arabia's economy remain strong due to high, albeit falling, oil prices, significant government spending on infrastructure projects and an expanding non-oil private sector."
Fitch said Saudi banks expanded their loan portfolios by an annualised 17.4 percent in the first half of 2014, compared with 14 percent in 2013, adding that it expects credit growth to remain strong in H2 of this year and 2015.
Its report said asset quality ratios are generally strong and are likely to remain stable due to the benign operating environment, improving underwriting standards and lending directed mostly toward government-related projects.
However, it added that high borrower and sector concentrations expose the banks to event risk.
Fitch said funding benefits from the banks' strong access to low-cost non-commission-bearing deposits, which helps to alleviate margin pressure.
"Customer deposits remain short-term, but are behaviourally sticky. Loan/deposit ratios in Saudi are among the best in the region," Fitch added.
"The banks also benefit from large volumes of liquid assets, including government securities and deposits with the Saudi Arabian Monetary Agency. However, given the growth in longer-term lending and that all banks have asset/liability maturity gaps, we believe the banks would benefit from a diversification of their funding base by raising long-term funding," it said.