Banks operating in Gulf kingdom are likely to see bad loans edge higher by end of the year, says ratings agency
The impact of lower oil prices will soon start to weigh on Saudi Arabia's banks, which are likely to see bad loans edge higher by the end of the year, according to Standard & Poor's.
Lenders in the kingdom have so far managed to defy many analysts' expectations by posting generally healthy results, despite the roughly 60 percent slide in oil prices since June of last year.
The ratings agency said it usually took a few quarters for asset quality issues to surface in a less resilient economy.
"Over the past few years, we have seen a stabilisation in asset quality and it has been a story of declining credit losses. But we now believe that through the end of this year we will begin to see credit losses picking up," said Timucin Engin, a banking analyst at S&P.
The ratio of banks' non-performing loans to total loans stood at 1.2 percent in the first quarter, up from 1.1 percent in 2014, according to data from the Saudi Arabian Monetary Agency, the central bank. That is down from its peak of 3.3 percent in mid-2010 when the kingdom's financial sector suffered some fallout from the global financial crisis.
S&P said historical data suggested there was a clear link between non-performing loans and oil prices. After oil prices sunk to a low of around $30 per barrel in late 2008, the ratio of bad loans more than doubled in the subsequent months, its data indicated.
The link is likely to be reinforced if, as expected, the government begins to slow spending, pumping less money into the economy.
Still, analysts are not overly worried about the health of the banking sector as the regulator requires lenders to keep coverage ratios well above the requirements proposed by Basel III and requires banks to make provisions for loans before they sour.
"Banks are cognizant of this [rising credit losses] and we would expect a gradual pickup in provisions," said Suha Urgan, another banking analyst at S&P.For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.