Mubasher: The Saudi banks are expected to see rising non-performing loans (NPLs) and higher provision costs due to increasing challenges in the construction sector, said Moody's Investors Service in a Tuesday's report.
NPLs are likely to rise to around 2.5% of gross loans in 2017, compared to an estimate of 1.5% as of June 2016, the report indicated.
"The Saudi construction sector has been negatively affected over the last two years by slowing economic activity and fiscal consolidation measures,
stemming from a lower oil prices environment. We expect the pressures to continue as the Saudi government aims to reduce its large fiscal deficit"
said Olivier Panis, a Vice President -- Senior Credit Officer, at Moody's.
The banks' exposure to the construction sector rose by 19.7% year-on-year as of June 2016, adding to the 8.9% increase in total bank credit over the same period.
The construction sector's NPLs are already the highest when compare to other sectors, at 3.1% of gross loans as of year-end 2015 (up from 2.8% as of year-end 2015) versus a total reported NPL ratio of 1.2%).
"This is indicated by the increasing proportion of NPLs in this segment, accounting for SAR4.1 billion or 27% of system NPLs as of year-end-2015, up from SAR1.9 billion or 8% of system NPLs as of year-end 2010, and a number of leading indicators of asset-risk trends monitored by Moody's point to rising pressures that will stem from the construction sector in next 18 months."
While the rating agency anticipated banks to face more loan problem and higher provisioning costs over the next 12 months, the magnitude of the asset quality deterioration is to be within the banks' profit margins, the reported revealed.
Further, high capital buffers will likely absorb a material stress from downside scenarios in the building and construction sector, the report concluded.
