Saudi Arabia’s five largest banks will be able to maintain profitability next year weathering lower government spending and slower economic growth that is likely to dent credit demand and soften borrowing, Moody’s Investors Service said in a report on Wednesday.
“As the Saudi government reins in spending, we expect lending to slow and problem loans to rise,” said Ashraf Madani, a senior analyst at Moody's in the report.
“However, the big-5 banks will be able to use their pricing power to offset these pressures and keep profit steady over the coming 12 to 18 months."
The report covers National Commercial Bank, the country’s largest lender, Al Rajhi Bank, Samba Financial Group, Riyad Bank and Banque Saudi Fransi.
Banks in the kingdom, the largest economy in the Arab world and world's biggest oil producer, will grapple with higher provisions and lower fees and commissions, which will be offset by higher interest rates, the report added.
“Provisioning costs will rise and fee income will fall as the economy slows, with corporate-focused lenders, Samba, BSF, Riyad Bank and to a lesser extent NCB being more vulnerable, as their clients are exposed to reduced government spending on infrastructure and construction projects,” the report said.
“Lower fees, commissions and foreign exchange (FX) income is being driven by lower trade and FX volumes. NCB is outperforming its peers through its ability to protect and grow its foreign exchange business.”
Al Rajhi is “best-positioned to main its profitability”, thanks to its focus on retail operations and limited corporate exposure, among other factors.
Credit growth in the kingdom is forecast to remain lacklustre next year and hover around 3 per cent as the non-oil economy grows by 2 per cent, the rating agency said.
Saudi Arabia has an A1 rating from Moody’s, the fifth-highest level, with a stable outlook.