The liquidity of the Saudi Arabian banking system has improved as public-sector deposits that were yanked from lenders in the aftermath of the 2014 oil crash to help shore up state finance return, Fitch Ratings said.
Despite that improvement, the bank industry's level of non-performing loans may rise because of the slowdown in the economy, the agency said.
"Most of the public-sector deposits that were drained from the banking system in 2016 in response to falling oil prices have since returned and the state has cleared the vast majority of its overdue payments to contractors," it said.
"Funding costs, which spiked during the 2016 tightening, have fallen back towards the very low levels to which most Saudi banks had become accustomed. Another wave of government deposit withdrawals is less likely now that Saudi Arabia is partly financing its fiscal deficit with sovereign debt issuance."
Fitch said most banks had strong liquidity coverage ratios of 200 per cent at the end of the end of the first half. During the same time there was a 1.4 per cent rise in non-performing loans amid sluggish economic growth. The agency said Saudi Arabia's GDP growth slowed to 1.4 per cent in 2016 from 3.4 per cent in 2015 and is expected to grow below 1 per cent both this year and next.
Still, despite the gain in non-performing loans, the levels are still low by global standards and the earnings of Saudi Arabian banks remain solid.
"Although higher impairment charges will affect capital ratios, slow loan growth and still-solid earnings should mean that sector capitalisation will continue to improve, with banks storing excess capital ready to deploy if and when the economy improves in the longer term," the ratings agency said.
Moody’s Investor Service earlier this year upgraded the outlook for Saudi Arabia’s banking industry to stable from negative, on expectations of a pick-up in non-oil economic growth and an improvement in the levels of cash available for lending following a spate of sovereign bond sales.
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The world’s biggest exporter of crude oil has been taking measures to shore up its finances in the wake of the steepest drop in oil prices since the financial crash of 2008. As part of that effort, the government sold US$17.5 billion in bonds in its first international sale last year and another $12.5bn last month.
The government is forecasting a budget deficit of 198bn riyals for 2017, compared with an actual deficit of 300bn Saudi riyals (Dh293.8bn) last year. In August, Saudi Arabia's ministry of finance said the kingdom narrowed fiscal deficit by a fifth from a year earlier in the second quarter, thanks to an uptick in revenues and a drop-in spending.
Revenues rose 6 per cent year-on-year to 163.9bn riyals during the second quarter, with oil revenues surging 28 per cent to 101bn riyals on higher oil prices.
Spending fell 1.3 per cent to 210.4bn riyals in the second quarter, cutting the deficit to 46.5bn riyals from 58.4bn riyals a year earlier.
The state relies on sales of crude to fund more than 75 per cent of its budget. The plummeting of oil prices have prompted the government to try to plug the gap in its finances via debt sales, reductions in subsidies and new forms of taxation.