Moody’s issued its latest banking sector report on Saudi Arabia in which it maintained a stable outlook on the system. This outlook expresses its expectation of how creditworthiness will evolve over the next 12-18 months.
The outlook is underpinned by Moody’s anticipation of a benign operating environment, low problem loans levels, strong loss absorption capacity and the sector’s stable, low-cost deposit base coupled with ample liquidity.
With regards to the operating environment, Moody’s expects non-oil private-sector real GDP to grow by 5.2% in 2012 and by 5.5% in 2013, following a 6.4% growth in 2011, with overall real GDP growth forecast at 6% in 2012, one of the highest rates in the GCC. Indeed, economic activity and banking system credit growth will be supported by both high government spending as well as increased private-sector business activity. Low government debt levels and sizable reserves will sustain spending and provide resilience against near-term oil price fluctuations and adverse developments related to the euro area crisis.
Concerning asset quality, it is set to improve slightly, as per Moody’s. NPLs to gross loans would decline below the December 2011 level of 3.0%. Yet, the banking sector remains somewhat exposed to the corporate sector, especially the relatively weakly transparent family-owned conglomerates.
At the level of profitability, Saudi banks are supported by the prevalence of non-interest-bearing deposits and good operational efficiency. As such, Moody’s expects net profits to remain strong over the outlook period. An increase in business activity will be the main driver of stable profit levels, counterbalancing the low lending interest-rate environment that weighs on margins.
Moody's Investors Service, Bank Audi Research