Profits at Saudia Arabian banks will outperform their GCC peers this year as the economy improves on greater government spending and higher interest rates boost net interest margins, according to Moody’s Investors Service.
“Saudi banks’ profitability improved in 2017 despite a challenging environment and a decline in lending,” analysts at Moody’s, led by Olivier Panis, said on Tuesday.
“We expect their profitability to remain broadly stable at this level in the next 12-18 months thanks to higher interest rates, a gradual pick-up in credit growth and fee-based income. We also expect Saudi banking system’s profitability to remain above GCC peers.”
The rating agency said that Saudi Arabian banks reported a 9 per cent increase in net profit in 2017 as net interest margins rose to 2.9 per cent from 2.5 per cent in 2016. Moody's said that banks in Saudi Arabia are particularly sensitive to rate increases because a large portion of their assets carry variable interest rates. At the same time, commission and fee income is expected to grow 5 per cent compared to last year as government spending leads to a recovery in trade and foreign exchange transactions.
Credit growth is expected to rise 4 per cent in Saudi Arabia amid a return of economic expansion, the agencysaid. Moody's said that it expects the country's economy to grow 1.3 per cent in 2018 after contracting 0.7 per cent in 2017.
While the level of non-performing loans is likely to rise, the banks have strong capital buffers and the government has shown willingness in the past to intervene with financial support in times of stress. The rating agency expects non-performing loans to rise to about 2.5 per cent of gross loans this year compared to 1.8 per cent in December 2017 because of an increase in lending activity that will raise the portion of bad debt.
“We view Saudi Arabia as a high-support country, based on the government’s track record of intervention to support banks in distress,” the analysts said.
The resurgence of growth in the kingdom comes as authorities focus on transforming the economy to make it less dependent on revenues from the sale of oil. As well as raising taxes and reducing subsidies, the country is also planning to sell a stake in Saudi Aramco, the world's biggest oil producer, to raise cash and attract more international investment.
Saudi Arabia is the largest Arab economy and its Tadawul index is the biggest by market capitalisation in the Arabian Gulf. The country is vying to be included in MSCI Emerging Market Index, a move that is forecast to attract billions of dollars into the kingdom's equities.
MSCI, whose emerging market gauge is tracked by fund managers with $1.7 trillion in assets, will announce a decision on whether to upgrade Saudi stocks to EM status in June.
The much-anticipated upgrade follows a series of market reforms initiated by Riyadh, designed to attract international institutions, including the easing of foreign ownership restrictions for local equities, the reduction of settlement cycles and the introduction of short-selling.