The outlook for the Saudi Arabian banking system remains stable and bad loans are expected to decline, Moody's said on Monday.
The rating agency said that these positive factors would be counterbalanced by issues such as "high loan and deposit concentrations, the opacity of family conglomerates and a vulnerability to a sustained drop in oil prices".
Moody's said it believes that the performance of the Saudi Arabian banking system will be supported by the expansion of non-oil private sector GDP, which Moody's expects will rise by 4.8 percent in 2011 and 5.2 percent in 2012.
The banks' performance will also benefit from continued high levels of government spending and resilience to oil price fluctuations over the next 12-18 months, it added.
"However, beyond the outlook horizon, the trend of a rising breakeven oil price in the country's budget will increase the vulnerability of the country - and therefore also that of the banking system - to a sustained drop in oil prices," the report said.
As a consequence of the benign operating environment, Moody's said it expects asset quality to improve slightly, with declining problem loans accounting for 2.5-3 percent of gross loans, down from 3.5 percent at the end of 2010.
Despite these improvements, Moody's also said it expects that asset quality will remain exposed to corporate sector vulnerabilities, including the relatively low transparency of family-owned businesses.
In Moody's opinion, Saudi banks continue to be profitable, supported by the prevalence of non-interest-bearing deposits, allowing the banks to absorb substantial losses without eroding capital.
Going forward, the rating agency said it expects bottom-line profitability to strengthen.
Moody's also said capital levels and recurring earnings provide an adequate buffer against losses.
The stable outlook, Moody's said, for the Saudi Arabian banking system was supported by the increasing level of deposit funding and liquidity, underpinned by the cash-rich Saudi government.
The outlook on Moody's Aa3 sovereign rating for Saudi Arabia is also stable.
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