RIYADH – The role of rating agencies in supporting the development of Saudi Arabia's debt capital markets will be explored at a forum on Tuesday (April 9) in Riyadh to be hosted by Standard & Poor's, the world's leading provider of independent credit risk research, analy-tics and benchmarks. Sponsored by the Capital Market Authority (CMA) of Saudi Arabia and the Institute of Banking (IOB), and supported by the Gulf Bond and Sukuk Association (GBSA), the event will discuss the opportunities and challenges of conventional and Islamic bond issuance in the context of key rating analytical, process and criteria developments. The event is designed for CEOs, CFOs, treasurers, advisors, bankers, financial intermediaries and institutional investors. Stuart Anderson, Managing Director & Regional Head, Middle East at Standard & Poor's, said: “The development of Saudi Arabia's debt capital markets is playing an important role in the effective allocation of capital in supporting broad economic growth. Further development of debt capital markets, including greater sukuk issuance, is key to supporting the Kingdom's extensive investment plans and infrastructure projects. Against this background, we see the S&P Forum in Riyadh as an important event that will generate valuable insights on how ratings can support the growth of a deep and liquid debt capital market” “Ratings greatly enhance the transparency and efficiency of debt capital markets, generating greater local, regional and global exposure for issuers, and contributing significantly to their development and diversification for the benefit of investors and financial market intermediaries,” he added. A panel of senior industry experts will discuss the Saudi funding environment and implications for balance sheet structuring. Panelists include senior executives from SABIC, Ernst & Young, JP Morgan and Al Bilad Investment Company. Hugh Baxter, S&P's Vice President and Global Head of Client Business Management, will speak on “The Relevance of Ratings to the Development of Financial Markets”. Other S&P officials who will address the Forum include Dr. Kai Stukenbrock, Senior Director; Andreas Kindahl, Senior Director; Emmanuel Volland, Director; and David Anthony, Director. S&P said recently in its Ratings Direct report that against the current gradual recovery in corporate loans, it considers that retail lending is particularly vital for Saudi banks to protect overall bottom-line results in a low-interest environment. Banks are seeking higher-yielding and fee-rich opportunities – typically retail-related business, including lending and brokerage – to avoid financial performance being on the wane until rates pick up on the asset side. Since 2008 growth in Saudi banks' lending volumes has decelerated, only to pick up more strongly in 2012, while a major portion of their assets matured and were replaced by lower-yielding and long-tenor instruments. S&P said Saudi banks enjoy generally lower cost of funding than their foreign counterparts due to their higher portion of unremunerated deposits, which is nevertheless exacerbated in the current low-interest rate environment. On the issue of whether SAMA will lower the risk weight it applies to calculate banks' capital adequacy from 100 percent to the 35 percent that Basel II prescribes, given that Saudi Arabia's current home loans will become property-secured mortgages, S&P said for “SAMA to take this step, it would have to be convinced that risks associated with mortgage lending had decreased. For the moment, though, how and when existing home financing portfolios might transition to mortgages under the law remains to be seen. Notably, it remains unclear whether these portfolios will remain on banks' balance sheets or transferred to separate real estate finance companies.” S&P believes existing home loan portfolios – largely based on Islamic leasing structures (Ijara) will co-exist with conventional property-secured mortgages. Also, the government has not indicated how banks will be able to foreclose on properties, and a track record of effective foreclosure will take time to build. SAMA has not communicated publicly on its willingness to be more flexible in terms of regulatory minimum capital-adequacy ratios (CARs) for banks, should it choose to lower the risk weights it applies to mortgage lending. Lowering this risk weight would provide significant relief to Saudi banks' CARs – about 1 percent to 2 percent depending on the bank--especially taking into account our view of the potential erosion in banks' capital adequacy over the next few years in a context of likely renewed growth but contracting margins. “In any case, we think SAMA will continue to apply its existing conservative approach to capital requirements. To our knowledge, SAMA has not yet provided guidelines to banks on limits of loan-to-value (LTV) ratios limits or debt burden ratios, both of which are largely left for individual banks to decide. As of today, there is no LTV limit, although we understand banks generally operate around estimated averages of 70 percent-80 percent, which we consider to be in line with international standards.” Similarly, current debt burden ratios, lowered in 2008, are equivalent to one-third of an individual's salary (or one-fourth of a retiree's pension) for consumer loans, which we understand do not include home financing. We believe Saudi banks generally operate with a soft guideline of about 50 percent-60 percent. — SG
