Credit growth, interest rates to boost Saudi banks’ profitability: Moody’s

A gradual pickup in credit growth and the positive effect of higher interest rates are likely to support Saudi banks’ profitability this year and offset continued provisioning efforts, Moody’s Investors Service said in a report on Thursday.

“With an improved return on assets of 2 percent for 2017, versus 1.9 percent in 2016, we expect Saudi banks’ profitability to continue to outperform other GCC banking systems,” the ratings agency said.

Lenders in the Kingdom reported a 9 percent year-on-year (YoY) increase in net profits in 2017, compared to a decline of 5 percent in 2016, which is "credit positive" given real GDP contracted 0.7 percent last year.

The improvement in earnings came mainly due to a 12 percent decline in interest expenses, reflecting an improvement in domestic funding conditions after significant tightening in 2016 because of falling oil prices.

“The results are credit positive for Saudi banks because their improvement occurred amid subdued economic activity that negatively affected credit demand and banks’ revenue,” Moody’s said, noting that lending contracted by 1 percent in 2017.

Meanwhile, the average cost of funds fell to 0.9 percent last year, after doubling to 1 percent in 2016, the ratings agency added.

“With limited growth opportunities, Saudi banks’ financing needs moderated, and banks were able to unwind more expensive funding sources such as time deposits, which declined 5 percent YoY in 2017, and wholesale funds, which declined 9 percent YoY,” the report said.

The improved funding environment reflected a steady reduction in the Saudi Arabian Interbank Offered Rate (SAIBOR), Moody’s added.

The SAIBOR fell from a peak of around 2.4 percent in October 2016 and has remained in a range of 1.7 to 1.9 percent since mid-2017.

Additionally, Saudi Arabian Monetary Authority’s (SAMA) decision to keep its repo rate unchanged at 2 percent, despite three interest rate increases by the US Federal Reserve in 2017, supported domestic liquidity and contained funding cost, the report noted.