Saudi Arabia's measures contained pandemic impact on banking system, Fitch says

Monetary and fiscal support and higher oil prices are supporting the kingdom's economic recovery, ratings agency says

The Riyadh skyline. Fitch Ratings says government measures to support Saudi Arabia's economy have contained the Covid-19 impact on the kingdom's banking system. Reuters

Measures taken by Saudi Arabia to curb the impact of Covid-19 on its economy and rising oil prices have helped the kingdom contain adverse effects of the pandemic on its banking system, Fitch Ratings has said.

"Operating environment pressures from the pandemic have reduced, helped by recovering oil prices, high credit growth and resuming economic activity," Amin Sakhri, a director at Fitch Ratings said in the latest peer review note on Saudi Arabian banks.

"Saudi banks have absorbed the shock for the main part and financial metrics are stabilising."

Fitch revised the outlook on all Saudi banks to stable from negative and affirmed their credit ratings at bbb+, which is the highest in the six-member Gulf Co-operation Council bloc, it said.

Government support measures including interest-free deposits and the strong loan growth in 2020 and the first half of this year, at 14.9 per cent and 19 per cent respectively, underpinned the robustness of the kingdom's banking system.

"Delayed recognition of impairments remains a key risk but Fitch Ratings believes the impact on the sector’s asset quality and overall financial profiles will be contained," it said.

The Saudi government unveiled support packages worth 261.9 billion riyals ($69.84bn) to support it economy and soften the impact of the pandemic on its banks and other financial institutions. The measures include liquidity provision support for small and medium-sized enterprises and larger private-sector entities through the banking system, allowing relief on existing debts and granting of new loans.

Rising oil prices are also supported the economic recovery of Saudi Arabia, Opec's largest oil exporter.

Brent, the global benchmark for more than half of the world’s crude, is currently trading at $83 per barrel level, with West Texas Intermediate above $80 per barrel. Both benchmarks have rallied more than 60 per cent this year.

The International Monetary Fund has said Saudi Arabia’s economy is expected to grow 2.8 per cent in 2021 after contracting 4.1 per cent last year.

However, Fitch expects a slower growth rate of 1.5 per cent in 2021 and 3.8 per cent in 2022, supported by higher oil prices.

Although the kingdom has bounced back strongly from the severe economic disruption last year, Riyadh continues to introduce programmes to boost growth momentum.

Earlier this week, Saudi Arabia’s Crown Prince Mohammed bin Salman launched the National Investment Strategy, which seeks to net 388bn riyals in foreign direct investments annually, the state-run Saudi News Agency reported.

The kingdom, the Arab world’s biggest economy, also plans to increase its domestic investment to about 1.7 trillion riyals by 2030 under the new strategy aimed at accelerating its economic diversification.

Fitch said banks in the kingdom have "strong capital buffers" and "we do not expect these buffers to weaken significantly as internal capital generation is likely to be supported by a recovery in the banking sector’s profitability".

The banking sector’s non-performing loan ratio of 2.1 per cent at the end of the first half of 2021 remains contained despite the severity of the pandemic, it added.

Saudi banks are also benefiting from limited competition in the market, which has helped their growth, the ratings agency said.