JEDDAH – Saudi Arabian banks are resilient to the global economic downturn due to the relative strength of the region, solid fundamentals and a conservative regulatory environment, said Nomura, which began coverage of the Saudi banking sector with a ?positive outlook.
Saudi banks are an attractive way of taking advantage of a rising interest rate environment, Nomura said. Owing to their high share of demand deposits and free funds, they should see their profits bolstered in the rising rate environment, the brokerage added.
“We believe banks’ high profitability should also derive from strong lending activity – thanks to government spending and retail/Islamic banking,” Nomura said.
In the short term, government’s infrastructure spending would be the main catalyst for a pickup in corporate lending volume growth, the ?brokerage said.
Saudi Arabia has pledged to spend $400 billion until 2013 to upgrade its infrastructure and has also launched a plan to build five economic and industrial cities to create new jobs. The government has doubled capital spending in the first quarter and is drawing on foreign reserves to weather the global crisis. “We believe Saudi banks should capture at least part of this large stimulus package by financing contractors,” Nomura said. In the mid-term, retail and Islamic banking would be the main drivers of balance sheet expansions, the brokerage added.
Nomura, however, said while the banks have curtailed risks in their investment securities, asset-quality deterioration due to “name lending” – a practice of granting loans based mainly on clients’ reputations – was likely to hurt their profits and partially offset top-line expansion.
Meanwhile, Capital Intelligence (CI), the international credit rating agency, announced Thursday that it has affirmed the ratings of the Saudi Investment Bank (SAIB), based in Riyadh. The long-term foreign currency rating of A, the short-term foreign currency rating of A1 and the financial strength rating of A-are all unchanged, as is the support rating of 2; however, a Negative outlook is appended to the financial strength rating, because of asset concentration and the potential for exposure to some troubled Saudi private corporate groups.
SAIB is Saudi Arabia’s third smallest bank by total assets, with a market share of about 4 percent. At yearend 2008 it operated 34 domestic branches, and currently all units except Head Office Treasury and three regional offices are fully Shariah-compliant. The bank has traditionally concentrated on Saudi corporates and investors for its target market; however, it is currently
In 2008, SAIB’s net profit had been adversely affected by liquidations and write-offs in the investment portfolio, and the current ratings assigned to SAIB already reflect those changes. At year end 2008 the bank’s investment portfolio had been repaired and its overall quality was in fact better than that of a year previous. However, other threats are on the horizon for 2009. Like most Saudi banks, SAIB faces the likelihood of write-offs and/or workouts relative to several large family-owned corporates sometime soon. Such actions may be daunting, even given the current strength of SAIB’s NPL coverage.
The events of 2008 had a negative impact on the bank’s capital ratios, which nevertheless remained sound. As a relatively small bank with some degree of concentration in its deposits, SAIB manages its liquidity closely; while liquidity was impacted by strong loan growth in 2008, it remained near the best in the sector. – SG/Agencies