Saudi banks stable despite oil price drop, says S&P

Saudi banks are expected to have enough capital to weather the economic stress created by the coronavirus pandemic, S&P said.

The ratings agency which assesses the creditworthiness of countries and companies believes the Kingdom’s banking sector is well placed to cope with the coronavirus fallout even if lenders are likely to see their cost of risk rise and their net interest income fall.

“We believe Saudi banks will have sufficient capacity to absorb this stress, despite a decline in net interest margins, which still compare well with those of most peers,” S&P said. “Notwithstanding the expected decline in profitability, most Saudi banks will remain profitable in 2020 and 2021 under our base case scenario.”

Mortgage lending is also expected to tick up in the coming years following the relaxation of capital requirements by the Saudi Arabian Monetary Authority (SAMA), S&P said.

Gulf banks have typically strong capital bases and are well placed to cope with economic shocks as they have relatively large sums on deposit that do not pay high interest rates. Rated GCC banks could absorb up to a $36 billion shock in additional credit losses before starting to deplete their capital base, S&P estimates.

While the profitability of some lenders may decline in the wake of the pandemic, most Saudi banks were still likely to remain profitable in 2020 and 2021, S&P said.

Saudi banks are the most resilient in the region to credit losses, according to the agency, while Bahraini banks are the least resilient due to limited government capacity to support the sector.