Saudi Arabia’s banks can look forward to a stable 12 to 18 months, with moves by some to penetrate the retail market and expand sharia-compliant products strengthening their market positions, according to a top ratings agency.
Moody’s Investors Service’s annual outlook on the Kingdom’s banking system, released on September 26, said that tight regulatory control and the government’s timely measures to stimulate the economy had helped the sector see off the worst of the financial crisis.
Moody’s added that this solid financial base pointed to stability for fundamental credit conditions that could lead to a steady increase in loan activity.
“Catalysts for potentially greater lending activity could include the banks’ strong liquidity and expectations of a peak in provisioning levels, in conjunction with banks’ efforts to maintain market share and margins in the current low-interest, low-growth environment,” said Christos Theofilou, Moody’s chief analyst on the Saudi banking system, in a statement issued to accompany the outlook.
A sharp increase in state-backed infrastructure projects, many of which are in the process of development, should see a climbing demand for loans, the report said.
Many analysts agree with Moody’s. John Sfakianakis, the chief economist at Banque Saudi Fransi, said the country’s macroeconomic stability had not only helped local banks ride out the global recession but also left them in a position to grow.
“The Saudi banking system has demonstrated resilience during the worst financial crisis the world has witnessed since the 1930s,” Sfakianakis told English language daily the Arab News on September 28. “The worst is behind us and as the global banking system is trying to come to grips with additional capital buffers going forward. Saudi Arabia’s capital adequacy ratio of 16.5% is above many other countries.”
While Moody’s report was generally upbeat, they did highlight the limited geographical diversification of Saudi banks had weighed on their assessment of the banks’ overall franchise value, as they remain linked to an economy that is still largely dependent on oil.
That said, Moody’s acknowledged that opportunities for franchise growth had been limited over the past two years, and that moves by some local banks to move into the retail banking market and increase their number of sharia-compliant products had had a positive impact.
The Moody’s report came hard on the heels of another study, this one produced by the Kuwait-based KIPCO Asset Management Company (KAMCO), which ranked the Kingdom’s banking system as the healthiest in the region.
Praise was again given to domestic regulators, with KAMCO saying that the “prudent regulations implemented by the Saudi Arabian Monetary Agency [SAMA, the country’s central bank] before and during the financial crisis have protected the banking system to a large extent from the repercussions of the financial and credit turmoil and helped Saudi banks to emerge more resilient.”
SAMA’s tight reins on the banking sector also received praise from the International Monetary Fund (IMF), which credited the regulator for its successful shoring up of confidence in the system and stimulating credit growth during the crisis.
“Prudent fiscal policy provided the fiscal space to respond forcefully to the global crisis. Good supervisory and regulatory frameworks also enhanced significantly the financial sector’s resilience,” the IMF said in its most recent report on Saudi Arabia, issued in late August.
Though there was a 10% decline in banks’ profitability in 2009, due to an increase in loan loss provisioning, the IMF said that the banking system exhibited resilience by weathering the crisis and was well protected against adverse shocks.
How well protected became apparent on September 26, when SAMA governor Muhammad Al-Jasser told local media that the country’s system had ample liquidity on hand and that private sector lending was up by 4.9% in August. This was proof, he said, that lending and therefore the economy as a whole was continuing its recovery.
The measured pace of the recovery from the 2008 crisis may not be a bad thing. Calculated growth, with the country’s banks avoiding major risks, should see both the economy and the banking sector maintain their stable progress.