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Fitch: Saudi Banks Overcome Liquidity Crunch but Profits Falling
April 4, 2017 / 7:56 AM / 8 months ago

Fitch: Saudi Banks Overcome Liquidity Crunch but Profits Falling

(The following statement was released by the rating agency) LONDON, April 04 (Fitch) The worst effects of the liquidity crunch that hit the Saudi Arabian banking sector in 2016 have passed, following a drive by federal authorities to inject and support system liquidity, Fitch Ratings says. The banks came through the period largely unscathed, with liquidity coverage ratios recovering and capital strength intact despite a dip in earnings. However, we expect profitability to continue declining in 2017, reflecting rising impairment charges and funding costs. Our analysis shows that liquidity metrics have recovered at banks that have reported their 2016 results. The average liquidity coverage ratio improved to 204% by end-2016, down just one percentage point yoy, having dropped to 156% at end-September 2016. The volatility of liquidity ratios highlights the concentration risk in many banks' funding. The improvement was driven by the injection of SAR20 billion (USD5.3 billion) of public-sector deposits into the sector in October 2016 and the introduction of seven- and 28-day repo facilities by the Saudi Arabian Monetary Authority (SAMA). These repo facilities significantly improve the sector's liquidity prospects and SAMA's relaxation of the maximum loans/funding ratio to 90% from 85% in February 2016 also alleviates some pressure. Liquidity was further boosted in 4Q16 when borrowers in the contracting sector received an estimated SAR75 billion of overdue payments from the government, allowing them to service their obligations to the banks. For the first time since the global financial crisis, the sector's net income was down, by 5% to SAR41 billion, driven by the liquidity crunch and a rise in impairment charges, as lower oil prices take their toll on the wider economy and reduce government spending. Saudi banks are highly reliant on large deposits from the public sector and falling oil prices triggered the withdrawal of liquidity by various federal bodies and government-owned enterprises. Funding costs more than doubled in 2016 as banks became more reliant on the interbank market and sourced liquidity from more expensive term deposits and by selling liquid assets. We expect funding costs to continue rising in 2017, particularly as the Saudi policy rate is likely to rise. Non-performing loan (NPL) ratios for the Saudi banking sector are still low by regional and global standards, rising only marginally by end-2016 to 1.2% (end-2015: 1.1%). However, tightening sector liquidity has affected borrowers' ability to service their debt. Several banks provided significant specific and general provisions against their loan books in 4Q16, reflecting the more challenging credit environment. Loan impairment charges (LICs) rose on average to 62bp of gross loans in 2016 compared with 40bp in 2015, eroding 22% of pre-impairment operating profit. Given the low base and the lag effect, we expect NPLs and LICs to rise further, albeit at a modest pace. Impairment charges on debt securities (due to rising government bond yields) and equity securities (due to weak stock market performance) also affected earnings. Despite the pressure on earnings, the main Saudi banks are still profitable by international standards, with an average return on assets of 1.7% in 2016 (2015: 1.9%). This reflects low, albeit rising, impairment charges and funding costs, and the banks' emphasis on cost control. Capital positions remain strong, with restrained growth in loan portfolios (just 2%) compensating for a 28% fall in internal capital generation and the average Fitch Core Capital ratio rising more than one percentage point to 16.9%. Contact: Andrew Parkinson Director Financial Institutions +44 20 3530 1420 Fitch Ratings Limited 30 North Colonnade London E14 5GN David Prowse Senior Analyst Fitch Wire +44 20 3530 1250 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT <a href="">WWW.FITCHRATINGS.COM.. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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