SAUDI'S BANKS ARE BETTER
FITCH - Liquidity for Saudi Arabian banks has improved significantly since last year but the slowdown in the economy is likely to lead to a rise in non-performing loans (NPLs).
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. Most banks had liquidity coverage ratios above 200% at end-1H17, which we view as strong. 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 international sovereign debt issuance.
But 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. GDP growth slowed to 1.4% in 2016 from 3.4% in 2015 and we expect it to be below 1% in 2017 and 2018. Most banks' internal rating assessments showed a decline in borrowers' creditworthiness in 2016 and 1H17 and there was a modest rise in the sector's NPL ratio in 1H17 to 1.4% of gross loans. However, this is very low by global standards and loan-loss coverage is strong (end-1H17: 180% across the banks we rate). 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.
Earnings metrics for Saudi banks are solid by global standards, with a sector return on assets of 1.8% for 2016. However, credit growth has slowed and, as a result, earnings have plateaued for many banks and started to decline in some cases. We do not expect a significant improvement in credit growth for 2017 and there is a risk of a sector-wide earnings decline given the asset-quality pressures.
Saudi banks are among the best capitalised globally, with a sector Fitch Core Capital ratio of 17.2% at end-2016. 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 of most of the 11 Saudi banks we rate are driven by their standalone credit profiles. Al Rajhi Bank, Banque Saudi Fransi, National Commercial Bank, Riyad Bank, SAMBA Financial Group and Saudi British Bank are rated the highest, at 'A-'. The smaller banks, whose ratings are driven by our expectation of a high probability of support from the Saudi authorities if needed, are rated 'BBB+'.
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AN - China National Offshore Oil Corp. (CNOOC) is willing to invest $3 billion in its existing oil and gas operation in Nigeria, the Nigerian National Petroleum Corporation (NNPC) said on Sunday following a meeting with the Chinese in Abuja.
REUTERS - Production at Libya’s giant Sharara oil field was expected to fall by at least 160,000 barrels per day (bpd) on Saturday after two staff were abducted in an attack by an unknown group, the National Oil Corporation (NOC) said.
IMF - Output grew by 3.8 percent in 2017, underpinned by a resilient non-hydrocarbon sector, with robust implementation of GCC-funded projects as well as strong activity in the financial, hospitality, and education sectors. The banking system remains stable with large capital buffers. Growth is projected to decelerate over the medium term.
IMF - Higher oil prices and short-term portfolio inflows have provided relief from external and fiscal pressures but the recovery remains challenging. Inflation declined to its lowest level in more than two years. Real GDP expanded by 2 percent in the first quarter of 2018 compared to the first quarter of last year. However, activity in the non-oil non-agricultural sector remains weak as lower purchasing power weighs on consumer demand and as credit risk continues to limit bank lending.