Profitability pressures to remain for top Saudi banks, says Moody’s

Five of the largest banks in Saudi Arabia could face further profitability pressures going into 2018 as lower government spending negatively impacts the country’s economic growth, Moody's Investors Service said in a report on Wednesday.

A slowdown in economic growth would in turn dampen credit demand and weaken corporate – and also consumer – borrowers' ability to repay debt, the agency added.

The five banks are: National Commercial Bank, Al Rajhi Bank, Samba Financial Group, Riyad Bank, and Banque Saudi Fransi.

“However, the big-5 banks will be able to use their pricing power to offset these pressures and keep profit steady over the coming 12 to 18 months," Ashraf Madani, vice president-senior analyst at Moody's, said in the report.

Al Rajhi is best-positioned to maintain its profitability over the coming quarters, driven by its strong focus on retail and limited exposure to corporate sector exposures, Moody’s said.

Al Rajhi also benefits from its large Islamic franchise and low cost retail deposit base.

“Rising interest rates will offset the impact on banks' profitability of higher provisions and lower fees and commissions, allowing them to reprice floating-rate corporate loans and achieve higher returns on their investment portfolios,” the report said.

Moody’s pointed out that Riyad Bank had seen a strong increase in net interest income in Q1 2017, despite negative growth in total earning assets.

Credit growth is expected to remain muted, the agency said. Non-oil GDP is estimated to grow by 2 percent, with credit growth at around 3 percent.

Provisioning costs are expected to rise and fee income will fall as the economy slows, Moody’s said.

Corporate-focused lenders such as Samba, BSF, Riyad Bank and NCB are seen as more vulnerable.

Lower fees, commissions and foreign exchange (FX) income will be in line with lower trade and FX volumes, with NCB expected to outperform its peers.

“All five banks have ample liquidity and strong capital buffers, with all banks reporting Tier 1 capital ratios above 15 percent. These capital levels by far surpass the minimum regulatory ratio of 8.5 percent and provide the banks with high loss-absorption capacity,” Moody’s said.