Saudi Arabian banks' financial cushion and the government's commitment to keep spending should enable them to weather a prolonged slump in oil prices, even though loan growth is slowing, Saudi British Bank (SABB) said.
SABB's Managing Director, David Dew, in an interview with Reuters on Sunday, also said he saw no possibility of the government abandoning the riyal's peg to the dollar.
The economic cost of lower crude prices in a country whose economy depends on oil exports, means Saudi banks will see lending grow at lower levels than the double-digit figures of recent years, Dew said.
SABB is the kingdom's fifth-largest lender by assets and is 40 percent owned by HSBC, Europe's biggest bank.
Dew, in a rare media interview by a Saudi bank executive, said he expected more private financing of infrastructure projects and that he saw little scope for more foreign banks in the kingdom.
"You still have a great deal of fiscal strength and flexibility that will be in place for a long period of time, pretty much regardless of oil prices," he said.
The Saudi Arabian Monetary Agency (SAMA), the central bank, had net foreign assets of $661 billion in July, down from a peak of $737 billion in August 2014. Since July it has also started to issue debt for the first time since 2007, with bond sales of $5.3 billion to local banks expected each month into next year.
"The kingdom continues to invest in significant projects that are designed to raise the productive capacity of the economy," he said, citing Riyadh's commitment to maintaining development spending in lean years.
Oil prices fell to a more than six-year low near $42 a barrel last month, and the International Monetary Fund forecasts the Saudi government will run a budget deficit this year of around 19.5 percent of gross domestic product. Last year's deficit was 3.4 percent of GDP and followed six years of high surpluses.
Growth in Saudi Arabia's bank lending to the private sector slowed to an annual 9.4 percent in July, the latest month for which figures are available, the lowest rate since September 2011.
Saudi non-oil private sector growth is closely tied to oil markets, with the government depending on crude sales for around 85 percent of its revenue, and traders have hedged against the risk of Riyadh devaluing its currency.
"The Saudi riyal is pegged to the dollar and I see no possibility of that changing," said Dew, adding that he saw no underlying economic rationale or fiscal need to change the peg given that Riyadh's energy exports are priced by the dollar.
"One of the reasons to typically devalue your currency is to promote exports and reduce imports, to make the economy more competitive. Changing the peg would do precisely nothing to oil exports and would make imports a little more expensive," he said.
The IMF has said the kingdom needs to consolidate its fiscal position to account for the oil price slump, and Finance Minister Ibrahim Alassaf said on September 6 that Riyadh would cut unnecessary expenses.
"My sense is the government is looking closely at next year's budget and I think that will provide a very interesting indication of their planning, their priorities and where they see future government spending," Dew said.
He added that he anticipated the government would continue drawing down its reserves and issuing bonds, and that it would also tap the private sector for involvement in infrastructure and development spending via public private partnerships (PPPs).
More state-owned companies might be partly privatised through initial public offerings (IPOs) on the stock market to help diversify the economy, he said.
While Dew acknowledged that the tougher economic environment resulting from low oil prices would raise the risk of bad loans in the banking sector, he said it would be lessened by banks' strong capital ratios.
Saudi commercial banks had a capital and reserves to total deposits ratio of 16.9 in July, up from 16.6 the previous year, according to SAMA data.
"I think it is a reasonable expectation to assume some increase in the cost of risk in the banking system based on previous economic cycles. I personally think it will be modest," he said.
Last week the government's investment agency said it would create new opportunities for US banks to join the small number of foreign institutions operating in the kingdom's tightly regulated financial sector.
Only 12 local commercial banks are licensed to provide fully fledged banking services in the kingdom, while another 12 international firms are licensed to do investment banking and asset management.
Dew said he thought any new entrant to the sector would struggle to compete.
The few foreign banks that had entered the market in recent years had made only a modest impact and local lenders were competitive and did a good job in meeting retail and wholesale needs of Saudi customers.
"It is hard to see any foreign bank coming in and having a significant impact on the banking system, because I think if that was to happen it would have already happened," Dew said.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.
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