Dark Clouds
By Trends • Jan 15th, 2012no significant impact on banks apart from the sharp reduction of brokerage fees.
Real demand. This is also true for Saudi Arabia’s real estate market, which S&P sees as being driven by real demand, especially in the residential segment. On the external side, Saudi Arabia posted sizable current account surpluses in the last decade and analysts expect this to continue.
Saudi banks have adequate lending practices and underwriting standards, as well as a good track record in maintaining strong asset quality indicators. Banks mainly deal with large corporate groups involved in government-backed projects. Because of the limited number of large corporate clients and narrow economic diversification, single-name exposures remain unacceptably high. Corporate governance for family owned groups and financial disclosure is improving, but only slowly.
In the retail segment, salary assignments against personal loans are a protective feature for banks. Mortgage financing represents less than 15 percent of personal lending and is unlikely to grow rapidly until a new legal framework is in place and has been tested.
S&P’s industry risk score for Saudi Arabia is “2”. This reflects its “low risk” assessment of the “institutional framework,” “competitive dynamics,” and “system-wide funding.”
The agency’s assessment of the “institutional framework” reflects its views that the Saudi Monetary Agency (SAMA, the central bank) monitors the banking system efficiently, preventing banks from entering into high-risk strategies or dealing with complex products. Analysts said that SAMA was instrumental in recent years in limiting the overall risk profile of banks by controlling credit growth, especially in the retail segment. “We assess the regulatory track record as ‘intermediate’,” said S&P.
Restrained appetite. SAMA has consistently favored the building-up of strong capital positions and provision buffers in recent years. Basel II regulations were implemented in 2008, leading to strengthened risk management practices, including the creation of a credit bureau. However, high single-name exposures would limit banks’ ability to absorb losses on an ongoing basis if a small number of large corporate borrowers defaulted at the same time.
There are only 12 commercial banks operating in Saudi Arabia, and market positions are unlikely to change markedly, in S&P’s view. Banks benefit from a well-protected franchise with good business opportunities. S&P considered that risk appetite is restrained as banks focus on customer driven commercial banking activities and better-controlled loan growth. The Saudi banking sector displays high and resilient profitability indicators. There are no particular market distortions affecting the sector. While various government-related bodies have significant stakes in banks’ capital, S&P believes that they do not interfere in day to-day management.
Banks rely on core customer deposits to fund their business. The loan-to deposit ratio is capped at 85 percent by regulation. On the negative side, the maturity of deposits is very short term and there is no significant domestic debt market.
S&P classified the government of Saudi Arabia as “highly supportive” toward domestic banking and recognized the government’s long track record of providing extraordinary support to the banking system in times of stress, and assesses its capacity to continue to do so as very high.
