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Saudi banks' profit growth is expected to be moderate in 2007, but more importantly be at sustainable levels, with lower stock market-related earnings and a slowdown in consumer loans.
Overall, the outlook for the Saudi banking sector remains stable, with banks continuing to benefit from the positive impact of high oil prices on the economy.
Soaring oil revenues have boosted the economy, leading to increased demand for loans and other banking services. Fee income from brokerage and asset management also grew strongly, exceeding 2005 levels despite the stock market correction in 2006. Impairment costs were low for the majority of banks, and operating costs were on the whole prudently controlled.
As a result, the Saudi banks were yet again some of the best performers in the GCC in terms of return on assets and return on equity.
The Saudi Arabian Monetary Agency's restrictions on the expansion of consumer lending will have an impact on performance, as this is a high-yielding, fairly low-risk asset for the banks. In the medium term, banks will also face competition from the new entrants licensed by the Capital Markets Authority to operate in investment banking, brokerage and asset management.
Therefore, Saudi banks are unlikely to repeat the strong results of 2005 and 2006, given the expected fall in brokerage/asset management revenues, the slow growth in traditional consumer lending and increased competition.
Steps
Institutions will counter these challenges by strengthening their core franchises and targeting fast-growing segments such as Islamic finance, credit cards, vehicle finance, mortgages, SMEs and project infrastructure finance. Fitch expects Saudi banks to improve their funding profiles in 2007 and into 2008 as more banks seek to raise Euro Medium-Term Notes, syndicated loans and other medium-term debt in order to reduce asset liability mismatches and funding concentrations.
Liquidity is not under any significant pressure, as banks enjoy very large and stable deposit bases, sizable liquid assets and supportive shareholders. Average impaired loans are relatively low at less than two per cent of total loans and with sound coverage ratios. Sector capitalisation should remain sound, especially at the lower rates of growth expected this year.
Fitch has also recently published 'support rating floors' for emerging market financial institutions. This criterion indicates the level below which Fitch would not lower its 'issuer default' rating in the absence of any changes to the assumptions underpinning the bank's support rating.
In the Gulf region, there has been a history of almost unquestioned willingness to support most banks, and this has led to relatively high support rating floors for Saudi banks, although in most cases, the ratings are driven primarily by the banks' intrinsic strength.
The author is Senior Director, Fitch Ratings.
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