Saudi banks 'largely unscathed' from 2016 liquidity crunch

Fitch Ratings says the worst effects of the liquidity crunch that hit the Saudi Arabian banking sector last year have passed
Saudi banks 'largely unscathed' from 2016 liquidity crunch
By Staff writer
Mon 10 Apr 2017 02:11 PM

The worst effects of the liquidity crunch that hit the Saudi Arabian banking sector in 2016 have passed, following a drive by federal authorities to inject and support system liquidity, according to Fitch Ratings.

The rating agency said in a new research note that the banks came through the period largely unscathed, with liquidity coverage ratios recovering and capital strength intact despite a dip in earnings.

However, Fitch added that it expects profitability to continue declining in 2017, reflecting rising impairment charges and funding costs.

Its analysis shows that liquidity metrics have recovered at banks that have reported their 2016 results with the average liquidity coverage ratio improved to 204 percent by end-2016, down just one percent year-on-year.

Fitch said the improvement was driven by the injection of SR20 billion ($5.3 billion) of public-sector deposits into the sector in October and the introduction of seven- and 28-day repo facilities by the Saudi Arabian Monetary Authority (SAMA).

Liquidity was further boosted in the fourth quarter of 2016 when borrowers in the contracting sector received an estimated SR75 billion of overdue payments from the government, allowing them to service their obligations to the banks.

For the first time since the global financial crisis, the sector's net income was down, by 5 percent to SR41 billion, driven by the liquidity crunch and a rise in impairment charges, as lower oil prices take their toll on the wider economy and reduce government spending.

"Saudi banks are highly reliant on large deposits from the public sector and falling oil prices triggered the withdrawal of liquidity by various federal bodies and government-owned enterprises," said Fitch.

It said that non-performing loan (NPL) ratios for the Saudi banking sector are still low by regional and global standards, rising only marginally by end-2016 to 1.2 percent, adding that tightening sector liquidity has affected borrowers' ability to service their debt.

Despite the pressure on earnings, the main Saudi banks are still profitable by international standards, with an average return on assets of 1.7 percent in 2016. This reflects low, albeit rising, impairment charges and funding costs, and the banks' emphasis on cost control.

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