Saudi banks' net interest income growth is credit positive: Moody’s

Rising net interest income among Saudi Arabia’s domestic banks is “credit positive,” Moody’s Investors Service said in a recent report.

The Kingdom’s 12 domestic banks reported a 3.2 percent year-on-year (YoY) increase in profit for the first nine months of 2017, mainly driven by rising net interest income and strong cost discipline.

“The positive results were achieved despite lower government spending and slowing economic activity (we expect real GDP to contract by 1 percent in 2017), which has led to negative lending growth and higher provisioning charges for most banks,” Moody’s said.

The lenders’ net interest income rose 8 percent in the first nine months, despite a 2 percent YoY decline in net loans as of September 2017.

The climb was driven by a 20-basis-point improvement in the net interest margin, up to 2.9 percent for the first three quarters of 2017, the ratings agency said.

“Such improvement reflected a combination of higher asset yields and easing funding costs,” Moody’s added.

The Saudi Arabian Monetary Authority (SAMA) increased lending rates in the country, following the three rate hikes by the US Federal Reserve since December 2016. This allowed domestic banks to re-price their loans – providing a boost to interest income.

“Funding costs remained under control owing to a large proportion of low-cost or zero-cost demand deposits. At the same time, banks transferred their excess of low-yielding cash balances placed with SAMA into investments in the latest government bonds and sukuk issuances, which attract better returns,” the report said.

Margins also expanded on lower interest expenses, which fell 4 percent YoY after the three-month Saudi Interbank Offered Rate (SAIBOR) reached around 1.8 percent in October 2017 – down from a peak of 2.4 percent a year ago.

Moreover, Saudi banks have successfully rationalized their cost bases, Moody’s said. In the first nine months of 2017, operating expenses were up 1 percent YoY, following a 5 percent increase in the same period in 2016.

“Although we expect economic conditions to remain challenging over the next 12-18 months (we expect real GDP growth of 1.1 percent in 2018), Saudi banks’ profitability should remain resilient, supported by a gradual pick-up in credit demand combined with further loan re-pricing in a rising rate environment,” the report said.