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Announcement:

Moody's revises outlook on Saudi Arabia's banking system to stable from negative

15 Mar 2017

DIFC - Dubai, March 15, 2017 -- Moody's Investors Service has revised its outlook for the Saudi Arabian banking system to stable from negative. The stable outlook reflects high risk-absorption buffers and easing funding pressures, as Saudi banks' credit profiles are expected to remain broadly stable over the next 12 to 18 months, says Moody's Investors Service.

"Despite low oil prices, which we expect to fluctuate between $40 and $60 a barrel over the next 18 months, and cuts in oil production, the Saudi economy will gradually recover, supported by government spending. As a result Saudi banks' liquidity and funding conditions will improve. Although profitability and loan performance will continue to soften, Saudi banks will maintain robust capital and loss absorption buffers compared to regional and international peers over the outlook horizon." says Olivier Panis, a Vice President at Moody's.

Moody's report, entitled "Banking System Outlook -- Saudi Arabia: High Risk-Absorption Buffers and Easing Funding Pressures Drive Our 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. The rating agency's report does not constitute a rating action.

According to Moody's, the operating environment for Saudi banks will recover. Whilst the rating agency expects real GDP growth to contract by -0.2% in 2017, increased government spending and projects to diversify economic output will support a gradual recovery of the non-oil economy, which will grow by 2% in 2017 versus 0.2% in 2016. Consequently, Moody's expects credit growth to remain low at 3% in 2017, but to gradually pick up from 2018.

Moody's expects non-performing loans (NPLs) to increase to 2.5% of gross loans over the outlook horizon, from a low level of around 1.4% as of September 2016. Although banks will also remain vulnerable to high single-party exposures and opacity in the corporate sector, banks will maintain the highest level of loan-loss provisioning coverage in the region.

Banks will maintain a solid operating performance, although subdued loan growth, rising provisioning charges and lower fee and commission income will weigh on profits. The impact will be partly mitigated by stable margins, low operating costs and easing pressure on funding costs.

Despite Moody's expectation of reduced profitability, subdued loan growth will support capital adequacy, which will strengthen from already strong levels. Moody's anticipates the sector's average tangible common equity (TCE) ratio will increase to around 17% by the end of 2018, up from around 16.2% in September 2016.

Moody's says that access to funding will improve owing to liquidity injections from international sovereign debt issuances, the clearing of large volumes of overdue payments to contractors by the government in Q4 2016 and modest credit growth. However deposit growth will remain low until economic activity picks up more materially in 2018.

Moody's expects Saudi authorities' willingness and capacity to provide financial support to the local banks to remain high, but notes that the policy stance of the Saudi authorities may evolve as the regulator is contemplating the adoption of the Financial Stability Board's best practice on the resolution of distressed banks.

Subscribers can access the report at:

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1055178

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Olivier Panis
Senior Associate
Financial Institutions Group
Moody's Investors Service Middle East Limited
Gate Precinct 3, Level 3
P.O. Box 506845
DIFC - Dubai
UAE
Telephone: 00971 4237 9536

Sean Marion
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Middle East Limited
Gate Precinct 3, Level 3
P.O. Box 506845
DIFC - Dubai
UAE
Telephone: 00971 4237 9536

No Related Data.
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