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23 Nov 2015
DIFC - Dubai, November 23, 2015 -- Moody's Investors Service has maintained its stable outlook on the Saudi
Arabian banking system, reflecting the rating agency's expectation
that in the context of persistently low oil prices, banks' profitability
and capital buffers will remain resilient and underpin their solid credit
profiles. The outlook expresses Moody's expectation of how
bank creditworthiness will evolve in the system over the next 12 to 18
Moody's report, entitled "Banking System Outlook -
Saudi Arabia: Resilient Profitability and Strong Buffers Drive Stable
Outlook" is available on www.moodys.com. Moody's
subscribers can access this report via the link provided at the end of
this press release. Please note that this report does not constitute
a rating action.
"Countercyclical government spending will continue to support the
non-oil sectors, to which most bank lending is directed,"
says Olivier Panis, a Moody's Vice President -- Senior
Credit Officer. "It will also help to moderate the negative
effect that prolonged low oil prices would otherwise have on the domestic
Despite a softening of the operating environment for Saudi banks,
Moody's forecasts real GDP growth of 2.8% for 2015
and 2.7% for 2016 (consistent with Moody's forecast
of Brent oil at $53 per barrel in 2016), slower than the
3.5% in 2014. As a result, the rating agency
expects credit growth to moderate to 8% in 2015 and around 5%
in 2016. In addition, loan performance is expected to weaken
from the strong 1.4% non-performing loan,.
"Asset quality is expected to weaken but will remain strong overall
with the ratio of total non-performing loans to gross loans remaining
below 2.5% for 2016," says Panis. "At
the same time, despite slowing credit growth, banks'
solid profitability will support a modest increase in capital buffers
from already solid levels."
Moody's base case is that the combination of solid net income and
moderating credit growth will result in an average tangible common equity
(TCE) ratio of around 16.8% at end 2016, an increase
of about 100 basis points from year-end 2014. These buffers
provide, in Moody's view, a significant mitigant against
both the expected asset quality pressures and the high level of concentration
risk in banks' loan books.
Saudi banks will also continue to benefit from a low-cost and stable
deposit funding base, although high levels of depositor concentrations,
primarily from the public sector, continue to represent a structural
challenge to the banks' funding, particularly in an environment
of low oil revenues.
"Bank liquidity is tightening across the region as a consequence
of persistently low oil prices and increased government borrowings,"
says Khalid Howladar, Senior Credit Officer based in Dubai.
"While we expect further modest reductions in public sector deposits,
Saudi, like other Gulf sovereigns, has chosen to avoid major
outflows to prevent further funding pressures on local banks."
Saudi slowdown in deposit growth remains relatively modest (4%
growth in the first half of 2015 versus 7% over the same period
in 2014) and Moody's anticipates that liquidity buffers will remain
solid into 2016 with around 33% of their total assets in liquid
assets as of June 2015.
Finally, Moody's considers it very likely that the Saudi government
would support the banking system in case of need. The rating agency
notes however that, in line with global practices, the Saudi
authorities have committed to the eventual implementation of a banking
resolution regime which may negatively affect the support available for
troubled banks once implemented, although the rating agency still
awaits regulatory clarity in this regard.
Subscribers can access the report at: http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_186033
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Moody's maintains stable outlook for Saudi Arabia's banking system
Moody's Investors Service Middle East Limited
Gate Precinct 3, Level 3
P.O. Box 506845
DIFC - Dubai
Telephone: 00971 4237 9536
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