Fitch says 5 Saudi banks show resilience

Fitch Ratings said five Saudi banks demonstrated resilience while operating in the increasingly challenging environment in Saudi Arabia, achieving standalone Viability Ratings (VR) higher than the 'bbb+' score assigned to the country's operating environment.

The five banks were National Commercial Bank (NCB), Banque Saudi Fransi, Saudi British Bank (SABB), Samba Financial Group and Al Rajhi Bank.

The remaining six Saudi Arabian banks rated by Fitch all have VRs either at or below ‘bbb+'.

Fitch noted that NCB, the country’s biggest corporate bank and second-largest retail bank, ‘’delivered earnings metrics that are among the strongest in the sector, and a strong retail franchise also supports a low-cost funding base and strong liquidity.’’

Saudi Fransi Bank's low risk policy, conservative underwriting standards, supports the bank's strong asset quality. But the operating environment is expected to eventually weigh on these ratios, though less pronounced than its peers.

SABB “achieves consistently strong profitability and core earnings generation and its earnings mix is well diversified across retail and corporate banking,’’ according to a research note by Fitch.

Samba's capital buffers are well above peers' and regulatory requirements, “reflecting the bank's asset mix where the loan book is small and the stockpile of domestic government securities is considerable.”

Al Rajhi Bank's low funding costs explain the bank's profitability metrics, which are the highest in the sector, “while more favorable regulatory capital treatment of retail lending drives strong capital ratios.”

Fitch warned, however, that lack of geographical diversification poses potential risks for the banks. The 11 banks rated by Fitch operate almost entirely in the local market, except NCB which has a Turkish subsidiary that represents 11 percent of its consolidated assets.

“The outlook for Saudi Arabia's sovereign rating is Negative in line with our expectations that the government's balance sheet will weaken further and the general government deficit will remain high during the closing months of 2016 and 2017,” Fitch said.

Fitch forecast GDP growth to drop to 0.9 percent in 2016 and 1.1 percent in 2017, compared with 3.5 percent in 2015 because of low oil prices. Hydrocarbon revenue represents 39 percent of GDP and 74 percent of government revenue.   

Fitch forecast gradual recovery in oil prices to $ 55/barrel by 2018.

“The economy is still highly reliant on government spending, currently being cut, and efforts to diversify revenues, part of the government's 'Vision 2030' plan, will take time to feed through,’’ Fitch concluded.