Liquidity improving at Saudi banks; NPLs to rise: Fitch

The Saudi banking sector’s liquidity has improved significantly since last year, but the ongoing economic slowdown in the Kingdom will likely increase non-performing loans (NPLs), Fitch Ratings said in a recent report.

Most of the public sector deposits that were drained last year following low oil prices have returned, and the Kingdom has also cleared the majority of contractors’ overdue payments.

Banks mostly had liquidity coverage ratios above 200 percent at the end of H1 2017, which Fitch Ratings views as strong, the report said.

“But we expect a rise in the sector's NPL ratio and muted credit demand in the second half of 2017 and 2018, reflecting the slowing economy,” the ratings agency added.

Saudi GDP growth slowed to 1.4 percent in 2016 from 3.4 percent in 2015. Economic growth is expected to be below 1 percent this year and the next.

Most banks' internal rating assessments showed a decline in borrowers' creditworthiness in 2016 and the first half of 2017. There was also a modest rise in the sector's NPL ratio in H1 to 1.4 percent of gross loans.

However, this level is “very low” by global standards and loan-loss coverage is strong, according to Fitch Ratings.

“Even factoring in delinquent loans that are not impaired, watch-listed exposures and restructured loans, we consider the sector's overall asset quality to be strong,” the report said.

The ratings agency added it does not expect a significant improvement in credit growth for 2017, noting that there is a risk of a sector-wide earnings decline given the asset-quality pressures.

In terms of credit ratings on individual Saudi lenders, Al Rajhi Bank, Banque Saudi Fransi, National Commercial Bank, Riyad Bank, Samba Financial Group and Saudi British Bank are rated the highest, at 'A-'.

The smaller banks are rated 'BBB+' by Fitch Ratings, the report said.