The fundamental credit outlook for the Saudi banking system is stable, reflecting the sector's resilience and its ability so far to absorb the adverse effects of the global financial crisis and deteriorating macroeconomic conditions, Moody's Investors Service said in its new “Banking System Outlook on Saudi Arabia.” The 10 Saudi banks rated by Moody's not only benefit from established and defensible local franchises, but have also improved their risk management culture in recent years aided by Basel II implementation. Moody's forecast that the banking sector will benefit from the Saudi government's continued commitment to supporting the economy with an expansionary budget and numerous infrastructure projects. It noted that the Saudi government has prudently invested its oil revenue windfalls of recent years and has historically been the main driver of economic activity. “The impact of the financial crisis has been contained, as Saudi banks are not significantly dependent on market funding. Moreover, any losses from structured products and other risky investments have been comfortably absorbed,” said Constantinos Kypreos, vice president - senior analyst in Moody's Financial Institutions Group based in Limassol. “The stable outlook is further supported by strict regulation, close monitoring and systemic support, which have ensured that the Saudi banking sector remains adequately funded and liquid, and is well-prepared to cope with economic downturns,” he added. Moody's further said that operating conditions remain tough, with nominal GDP in 2009 likely to decline by 10-15 percent due to the fall in oil revenue. However, although Moody's expects these conditions to lead to a deterioration in the Saudi banking sector's financial metrics, the rating agency nevertheless believe that the metrics are likely to remain supportive of the banks' current ratings. The rating agency pointed out that downside risks implied by the volatile market conditions could be exacerbated by a further deterioration in the operating/macro conditions and a worse-than-anticipated deterioration in asset quality. (In particular, private sector corporate and family-owned businesses remain the most vulnerable loan category as the recent issues surrounding the Algosaibi and Saad Groups have demonstrated.) If these weaker-than-anticipated parameters do materialize - and this is a real risk - then profitability and capitalization metrics of Saudi banks would also be affected. Moody's cautions that such an outcome could prompt us to consider changing the outlook for the sector. Moody's noted that other challenges faced by the Saudi banking sector include the high concentrations in lending and deposits; mismatches in the maturity profiles of assets and liabilities; scarce human capital; the continued limited diversification of the Saudi economy beyond the hydrocarbons sector and volatility in the country's real and nominal output; and the strong loan growth of recent years, which is only now being tested by more challenging operating conditions. During the economic boom, Saudi companies aggressively built up their asset base to meet demand. Between 2004 and 2008, the Saudi companies almost tripled their total asset base, to a total of more than SR250 billion by the end of 2008. The grew fixed assets much faster then GDP growth, another report said. said Vayanos. The assets were intended to generate additional sales in line with expectations of perpetual growth. “Now that growth has moderated and declined, it's clear these companies overshot demand. It will take much more time for new fixed assets to pay for themselves,” he added. __
