The Banking Executive Magazine - May 2022 Issue

SAUDI BANKS TO BENEFIT FROM HIGH OIL PRICES, RATE HIKES Saudi banks’ standalone credit pro- files will be supported by high oil prices, rising interest rates and strong credit growth in 2022-2023, said top ratings agency Fitch, adding that higher interest rates will underpin profitability and capital generation and banks will maintain strong capi- tal ratios. Saudi banks’ standalone credit pro- files will be supported by high oil prices, rising interest rates and strong credit growth in 2022-2023, accord- ing to top ratings agency Fitch Rat- ings. The banks have largely absorbed the pandemic shock, helped by a strong economic rebound, while the operating environment should re- main favorable, supporting credit performance and liquidity. Fitch expects higher interest rates to underpin profitability and capital generation, and banks to maintain strong capital ratios. Saudi banks’ weighted average Via- bility Rating of ‘bbb+’ is one of the highest in emerging markets. Most Saudi banks’ Long-Term Issuer De- fault Ratings are on Positive Outlook, reflecting that on the sovereign, it stated. The improving operating environ- ment is supported by high oil prices (Fitch forecasts $100/bbl in 2022 and $80/bbl in 2023). The ratings agency expects real GDP growth of 7.5% in 2022 and 3.1% in 2023, driven by high oil prices and increased spend- ing on government projects. Recent purchasing managers’ index readings suggest still-strong operating conditions in the non-oil sector and we expect business confidence to re- main high in 2022-2023. Credit quality should benefit from improv- ing economic conditions. The banking sector’s non-performing loan ratio decreased to 1.9% at end- 2021 from 2.3% at end-2020, ac- cording to the Saudi central bank, and we expect it to improve further in 2022. Loan growth should remain strong at about 12% in 2022 (2021: 15.5%), driven by continuing strong growth in retail mortgages and a re- covery in corporate lending. Saudi banks are well positioned to benefit from higher interest rates given that about two-thirds of the sector’s deposits are non-interest- bearing. The US Federal Reserve increased its benchmark rate by 50bp last week and we expect it to continue raising the rate throughout 2022, a path which the Saudi central bank is likely to mirror given the peg with the US dollar (it has already matched the Fed’s 50bp increase). Domestic inter- bank rates are factoring in several rate increases, with the six-month Saudi Arabian Interbank Offered Rate up 175bp in 2022 to its highest level since June 2019. Fitch expects corporate-oriented banks, such as The Saudi British Bank, Alinma and Banque Saudi Fransi (all ‘BBB+’/Positive) to benefit soon from rate rises given their high proportions of loans re-pricing within one year and non-interest-bearing deposits. Rated Saudi banks’ average net inter- est margins widened by 80bp in 2015-2019, the last monetary tight- ening cycle. However, we believe the impact of higher rates in 2022- 2023 will be less significant due to the sector’s much higher exposure to fixed-rate mortgages (22% of loans at end-2021 compared with 9% at end- 2017), it stated. "We expect loan impairment charges (LICs) to decline in 2022-2023, sup- ported by improving operating con- ditions and the front-loading of provisions in 2020. LICs consumed only 18% of pre-impairment operat- ing profit on average in 2021, down from 26% in 2020," said Fitch in its review. "We think the ratio will decrease fur- ther in 2022-2023 as improving op- erating conditions limit LICs and rate rises support pre-impairment operat- ing profit. Most of the banks have guided for a lower cost of risk in 2022," it added. ISSUE 161 MAY 2022 the BANKING EXECUTIVE 33