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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U.S. DT - The sum total in September of all net foreign acquisitions of long-term securities, short-term U.S. securities, and banking flows was a net TIC outflow of $29.1 billion. Of this, net foreign private inflows were $23.5 billion, and net foreign official outflows were $52.7 billion.
U.S. FRB - Industrial production edged up 0.1 percent in October, as a gain for manufacturing outweighed decreases elsewhere. As a result of upward revisions primarily in mining, the overall index is now reported to have advanced at an annual rate of 4.7 percent in the third quarter, appreciably above the gain of 3.3 percent reported initially.
WNN - "nuclear energy is a "mature, low greenhouse gas emission source of baseload generation that could make an increasing contribution to global development based on low-carbon energy supply".
ARAB NEWS - Saudi Arabia has shown investment interest in Pakistan’s largest coastal refinery, a multibillion-dollar project being set up at Khalifa Point, near Hub, Balochistan, officials have confirmed.