Asset quality of Saudi banking sector to improve, says SAMA official

The asset quality of the banking sector in Saudi Arabia and generally in the region would improve as suggested by several positive macro indicators, Dr. Fahad Alshathri, Deputy Governor for Supervision, Saudi Arabian Monetary Authority (SAMA) said at an event in Dubai today.

Alshathri was delivering his keynote speech at the Second Annual Corporate Restructuring Summit.

The first positive macro indicator, he said, is the recent positive movements in oil price.

Global oil prices have been at the center of the asset quality related stress witnessed in most parts of our region over the past few years, he added.

“Recent oil price trends have been positive although they have come under pressure in the last few months mainly because of trade related issues between China and the USA,” Alshathri noted.

He also stated that even if oil prices were to decline from their current levels, they are still likely to be higher than the levels budgeted by the governments in the region.

“We are optimistic that this will be positive for asset quality trends in the banking sector,” he added.

The second positive macro indicator, he noted, is government expenditure pattern that has been a major factor determining the direction of banks’ asset quality in the past few years.

NPL formation rates generally move up when government expenditure declines.

“We expect future government payments especially in Saudi Arabia to be driven in part by the direction of the oil price and government capital expenditure plans, i.e. the fiscal budget,” he said.

As a result, the higher budgeted spending is expected to be a positive for banks’ asset quality trends, Alshathri maintained.

Finally, he said, the recent and expected future US Fed rate reversal could bode well for lowering the cost of doing business for corporates and aid the eventual impact on corporate loan demand.

“While we expect some downward pressure on banks Net Interest Margins (NIM) post the recent Fed interest rate cut during the second half of 2019 and the first half of 2020, we nevertheless expect banks to utilize other strategies to defend any pressure on their NIMs,” Alshathri noted.

He said the ongoing economic reform process in the Kingdom envisages a number of structural changes for the Saudi economy.

“We are seeing the reform process also bearing fruits in the banking sector with a greater consumer sector lending, especially mortgage lending where the currently small market is expected to double in size in the next few years,” Alshathri said.

Overall, the Saudi economy is ticking along reasonably well, he added.

“The Saudi Arabian economy registered a 2.4 percent growth last year following a contraction in 2017. This recovery was mainly attributed to the oil sector, which grew by 3.13 percent. The private sector grew by 1.9 percent in 2018”, he noted.

The Saudi economy is expected to pick up further during 2019, given the expansionary fiscal policy that is currently in place, Alshathri maintained.

Having said that, there are always risks to the economic growth prospects of any country, he added.

“The downside risks for the Saudi economy areas likely to come from any global economic slowdown and its potential impact on the global oil market. We are concerned about the growing US-China trade tensions and the impact any possible slowing in the Chinese and European economies would have on global growth in the near term,” he said.

A boost to Saudi workforce participation rate is also generally supporting the consumer banking market, Alshathri concluded.

Write to Sunil Kumar Singh at sunil.kumar@argaamplus.com