Reduced project pipeline poses risks for Saudi banks: Moody’s

Saudi banks are likely to see rising non-performing loans (NPLs) and higher provisioning costs amid a growing number of challenges in the kingdom’s construction sector, Moody’s Investors Service said in a report on Tuesday.

The drop in oil prices, which led to austerity measures and a slowdown in economic activity, has hurt the Saudi construction industry over the last two years, said Olivier Panis, a vice president at Moody's.

“As a result, the building and construction sector will likely contribute materially to the increase in NPLs at Saudi banks,” he added, noting that the ratings agency expects NPLs to rise to around 2.5 percent of gross loans next year, from around 1.5 percent estimated as of June 2016.

Saudi banks’ exposure to the construction sector increased by 19.7 percent year-on-year (YoY) as of June 2016, well above the 8.9 percent increase in total bank credit over the same period. This, in turn, has contributed to a significant increase in the sector's indebtedness, the report said.

“The building and construction sector in Saudi Arabia is already the main contributor to NPL formation at Saudi banks over the past five years and we expect this will remain the case in the coming quarters,” Panis said.

“This is indicated by the increasing proportion of NPLs in this segment, accounting for SAR 4.1 billion or 27 percent of system NPLs as of year-end-2015, up from SAR 1.9 billion or 8 percent of system NPLs as of year-end 2010.”

While Saudi banks are expected to see increased problem loans and higher provisioning costs over the next year, Moody’s said it expects the magnitude of the asset quality deterioration to be within the lender’s profit margins.

In addition, the high capital buffers of banks in the kingdom can absorb a material stress from challenges in the building and construction sector, the report said.

Saudi Arabia’s construction sector has been hard-hit by cutbacks in public spending, as the government canceled or scaled down on several projects and postponed payments in the wake of falling oil prices.

The total value of construction contracts awarded in the kingdom fell 27 percent quarter-on-quarter in Q2 2016 to SAR 20.3 billion, National Commercial Bank’s Construction Contracts Index showed in August.

Thousands of employees at the country’s biggest construction firms, Saudi Oger and Saudi Binladin Group, were laid off during the slowdown, while others have seen their wages delayed by several months.