Saudi banks’ profits to decline in 2017 on rising costs: Fitch

Saudi Arabian banks will continue to see their profitability declining in 2017, reflecting rising impairment charges and funding costs, Fitch Ratings said in a report on Tuesday.

“We expect funding costs to continue rising in 2017, particularly as the Saudi policy rate is likely to rise,” the rating agency said.

It, however, added that the worst of the liquidity crunch that hit the kingdom’s banking sector in 2016 has passed, following a drive by federal authorities to inject and support system liquidity.

The agency said the liquidity metrics have recovered at banks that have reported their 2016 results. The average liquidity coverage ratio improved to 204 percent by the end of 2016, down one percentage point year-on-year (YoY), having dropped to 156 percent at the end of September 2016, the report noted.

The improvement was driven by the Saudi Arabian Monetary Authority (SAMA) injecting SAR 20 billion of public-sector deposits into the sector in October, along with the introduction of seven- and 28-day repo facilities.

“Liquidity was further boosted in 4Q16 when borrowers in the contracting sector received an estimated SAR 75 billion of overdue payments from the government, allowing them to service their obligations to the banks,” the report added.

Non-performing loan (NPL) ratios for the Saudi banking sector are still low by regional and global standards, rising only marginally by 2016-end to 1.2 percent as compared to 1.1 percent the year before.

Tightening sector liquidity, however, has affected borrowers' ability to service their debt.

Impairment charges on debt securities (due to rising government bond yields) and equity securities (due to weak stock market performance) also affected earnings, the report said.

It added that 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 versus 1.9 percent in 2015.

“This reflects low, albeit rising, impairment charges and funding costs, and the banks' emphasis on cost control,” the report said.

Banks’ capital positions remain strong, with restrained growth in loan portfolios compensating for a 28 percent fall in internal capital generation.