Liquidity of Saudi banks has improved, but economic slowdown raises NPL risk

Fitch Ratings expects Saudi GDP growth to further weaken to below 1 percent this year and in 2018, from 3.4 percent in 2015 and 1.4 percent in 2016. (Reuters)

DUBAI: The liquidity of Saudi Arabian banks has improved significantly since last year, but a slowdown in the Kingdom’s economy would likely cause a rise in non-performing loans, Fitch Ratings said.
Most of the public-sector deposits that were drained from the banking system last year due to a weakness in oil prices have since returned and the government has already paid most its overdue payments to contractors, the ratings agency said.
“Funding costs, which spiked during the 2016 tightening, have fallen back toward the very low levels to which most Saudi banks had become accustomed,” Fitch Ratings said.
Fitch Ratings said that most Saudi lenders had liquidity coverage ratios above 200 percent during the end of the first half, which it viewed as “strong.”
“Another wave of government deposit withdrawals is less likely now that Saudi Arabia is partly financing its fiscal deficit with international sovereign debt issuance.”
The Kingdom raised $12.5 billion from international investors last month, the third time it has accessed global bond markets in less than a year. It sold $17.5 billion worth of conventional bonds last October and in April the Kingdom issued a $9 billion Islamic bond.
“We expect a rise in the sector’s NPL ratio and muted credit demand in the second half of 2017 and 2018, reflecting the slowing economy,” according to Fitch Ratings, with GDP growth expected to further weaken to below 1 percent this year and in 2018, from 3.4 percent in 2015 and 1.4 percent last year.
Despite expectations of higher non-performing loans, Fitch Ratings said that Saudi lenders would remain aptly covered as NPL levels would be very “low by global standards and loan-loss coverage is strong.”
“Even factoring in delinquent loans that are not impaired, watch-listed exposures and restructured loans, we consider the sector’s overall asset quality to be strong,” Fitch Ratings added.