Riyadh-Mubasher: Saudi banks are expected to face difficult operating conditions over the next two years, due to pressure on government spending and the expected impact on the domestic economy, said Standard & Poor's (S&P).
The kingdom’s banking system has enjoyed a buoyant operating environment over the past four years, posting double-digit average growth of assets, loans, and deposits, alongside a decline in credit losses and a significant improvement in nonperforming loan coverage ratios, the global rating agency said.
However, with the drop in oil prices, several challenges emerged in the second half of 2015.
“While credit growth lost some momentum, local interest rates started increasing in response to tightening liquidity,” S&P said.
Although banks' asset quality did not come under threat, potential risks emanate from certain sectors, such as construction, where contractors are reportedly facing payment delays.
"We expect that credit growth will contract to mid-single digits, given the strong correlation between oil prices, government spending, and credit growth," said S&P's credit analyst Suha Urgan.
"We also anticipate that asset quality will deteriorate but remain tightly managed, owing to countercyclical buffers the regulator has imposed in recent years, and we expect further tightening of overall liquidity conditions, leading to higher funding costs."
He added that the sharp drop in oil prices and the resulting impact on Saudi Arabia's fiscal balance will weaken operating conditions for the banking sector.
“We expect banks' profitability will decline in 2016, owing to lower credit growth combined with a rise in funding costs and credit losses," Urgan said.
