Saudi banks are in good condition and maintaining “strong financial fundamentals” despite the difficult economic conditions worldwide, ratings agency Moody's Investors Service said in its report on Saudi Banking Outlook released on Monday. “The Saudi banking system's current and historically strong financial fundamentals highlight its resilience during a period when operating conditions have been challenging,” Christos Theofilou, Moody's Saudi banking analyst, said in a statement. The resilience is supported by (1) the government's fiscal stimulus, which has sustained macroeconomic growth; (2) the banks' robust financial fundamentals, including strong liquidity, and adequate profitability and capitalization; and (3) a prudent regulatory environment. Moody's rated the condition of the banking system “stable” over the coming 12 to 18 months, saying that economic growth driven by the government's massive infrastructure and education spending underpins the banks' resilience. But the banks face challenges to profitability due to pinched margins and slow business growth, Moody's said in its annual report. However, Moody's report says that the low interest rate environment is exerting pressure on the banks' profitability through reduced margins and lower business growth. “Catalysts for potentially greater lending activity could include the banks' strong liquidity and expectations of a peak in provisioning levels, in conjunction with banks' efforts to maintain market share and margins in the current low-interest/low-growth environment,” Theofilou said. There are indications of a pick-up in loans to the private sector, with a healthy pipeline of projects expected over the next 18 months. Moody's also cautions that growth is likely to remain below pre-crisis levels. Overall, Moody's expects the banks' 2010/2011 net income to be modestly higher than it has been over the past two years, mainly because of expected lower provisioning charges. As regards asset quality, non-performing loans (NPLs) should remain close to current levels, as the family dispute between AH Algosaibi & Brothers (AHAB) and Saad Group (Saad) is not expected to be settled in the near term and private sector loan quality is expected to stabilize. Furthermore, strict regulation, close monitoring and systemic support should ensure that the sector remains adequately funded, liquid, and well prepared to cope with any further economic downturn. Most of the rated Saudi banks have solid local franchises, as well as a strong share in their respective market segments. Nevertheless, the rated Saudi banks' limited geographical diversification continues to weigh negatively on Moody's assessment of the banks' overall franchise value as they remain vulnerable to an economy that is still largely dependent on oil. While opportunities for franchise growth were limited over the past two years, Moody's believes that Saudi banks' initiatives to penetrate the retail banking market and expand their Shariah-compliant products have strengthened their business franchises and market positions. Low interest rates and still-mild demand from private sector borrowers means that margins will remain under pressure, limiting the ability of the banks to grow their profits, Moody's said. In addition, despite the economic growth, banks will be unable to claw back much of their non-performing loan reserves because the 10-billion-dollar-plus scandal involving two leading Saudi business families, the Saad group and the Algosaibi group, remains far from resolved, Moody's said. Inflation seen above 5% until June 2011 Saudi inflation will likely remain above 5 percent until the first half of 2011 due mainly to a chronic shortage in low- to medium-level housing, state-owned National Commercial Bank (NCB) said on Monday. Consumer price growth in the world's top oil exporter and the biggest Arab economy climbed to an 18-month high of 6.1 year-on-year in August, far above levels seen in the fellow Gulf oil producers but still below 2008 record double-digit peaks. “Rental costs have been the main factor behind recent inflationary pressure as the young population increases its demand for affordable low-to medium-level housing while real estate developers focus on expensive commercial office and luxury housing,” NCB said. “(This) widens the gap between (housing) demand and supply,” it added. The implementation of mortgage law may help to reduce pressure on rental prices by easing financing and boosting supplies, but it also could stimulate demand. – QJM it also noted. “We anticipate that the inflation rate will continue to be above 5 percent in 2010 and the fist half of 2011,” NCB said. Muhammad Al-Jasser, governor of the Saudi central bank, said on Sunday inflation was worrying but that he did not plan to change interest rates as it is driven by factors outside the bank's reach such as a surge in food prices. - SG/Reuters
