Riyadh - Decypha: Profits of Saudi Arabian banks will further decline in 2017 due to rising impairment charges and funding costs, said a report by Fitch Ratings.
The liquidity crunch felt be the banking sector in 2016 has eased as the federal authorities support and try to revive system liquidity. The liquidity average ratio improved to 204% by the end of 2016, where in September it dropped to 156%, according to the agency.
Improvement in liquidity is primarily due to Saudi Arabian Monetary Authority (SAMA) injecting SAR 20 billion into the sector this past October as well as introducing seven- and 28-day repo facilities.
Liquidity was further boosted during the fourth quarter of the year (4Q-16) when borrowers in the contracting sector received overdue payments worth SAR 75 billion from the government, allowing them to service their obligations to the banks, the report stated.
The funding costs is expected to continue to rise as the Kingdom’s policy rate will probably rise in 2017
Non-performing loan (NPL) ratios for the Saudi banking sector rose slightly in 2016 to 1.2 % compared to 1.1 % the previous year, considered low by regional and global standards.
“This reflects low, albeit rising, impairment charges and funding costs, and the banks' emphasis on cost control,” the report said.
The tightened sector liquidity has impacted borrowers' ability to service their debt, according to the report.
Rising government bond yields has affected impairment charges on debt securities and weak stock market performance has impacted equity securities, both of which influenced earning levels.
By global standards, the Kingdom’s banks are still profitable and strong, with the average return on assets recorded at 1.7% in 2016 versus 1.9% in 2015. Furthermore, limited growth in loan portfolios has compensated for a 28% fall in internal capital generation.
By Decypha Editorial Team
