Riyadh-Mubasher: Moody's Investors Service has changed its outlook for the Saudi banking sector to negative from stable, according to the agency’s rating issued Wednesday.
The outlook reflects the agency's expectation that the persistently low oil prices and resultant government spending declines will ultimately weigh on the sector.
"We expect the operating environment for Saudi banks to weaken over the next 12-18 months," said Olivier Panis, a Moody's vice president, senior credit officer.
"With the prospect of lower oil prices for longer and a 14% reduction in public spending in 2016, we believe that the credit risks across the system are rising," he added.
Moody's forecasts real GDP growth to slow to 1.5% for 2016 and 2% for 2017 (well below the 3.4% growth of 2015) and for average oil prices to stay at $33 a barrel in 2016 and $38 in 2017.
Accordingly, the agency expects loan growth to slow down to between 3% and 5% for 2016, from 8% in 2015 (and 12% in 2014). It also forecasts asset risk to rise as a result of the deteriorating operating environment.
"We expect non-performing loans to increase to around 2.5% of total loans over our outlook horizon, from a very low average 1.4% in September 2015 -- still lower than for most other Gulf countries," said Panis.
"Banks will also continue to remain exposed to event risks stemming from persistently high single-party exposures -- although we estimate that around 10%-25% of banks' top 20 loans are either to the government or wider public sector," he added.
