Banks in Saudi Arabia reported a 7.5 percent year-on-year (YoY) increase – 18 percent quarter-on-quarter growth – in net profit for the first quarter 2018, mainly because of lower interest expenses and provisioning charges, Moody’s Investors Service said in a recent report.
The results are credit positive for Saudi banks because the improvement occurred amid subdued economic activity that negatively affected credit demand and banks’ revenue, the rating agency added.
Lending contracted by 1 percent YoY as of March 2018.
Interest expenses of the lender declined 12.5 percent YoY (and 2 percent quarter-on-quarter), reflecting improving funding conditions in Saudi Arabia after significant tightening in 2016, the report noted.
“Saudi Arabia’s improving liquidity and funding conditions since 2017 have narrowed the Saudi Arabian Interbank Offered Rate (SAIBOR) spread against US dollar-denominated London Interbank Offered Rate, even reaching negative spreads in March 2018, despite a number of rate hikes by the US Federal Reserve,” Moody’s said.
Since April, the SAIBOR has risen to around 2.4 percent, following a decision by SAMA to increase its repo rate in response to a decline of Saudi money rates below US rates.
Moody’s, however, does not expect that the increase to create immediate upward pressure on interest expenses given limited credit growth and Saudi banks’ favorable funding profile.
“Moody’s expects interest income generation to remain challenged given subdued lending activity, somewhat balanced by higher returns on investment portfolios and the gradual re-pricing of variable-rate assets,” the agency said.
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