The outlook for Saudi Arabia's banking system remains stable, says Moody's Investors Service in a new Banking System Outlook. The key drivers of the outlook are (1) a benign operating environment; (2) low problem loan levels; (3) strong loss-absorption capacity, underpinned by high capital buffers and solid profitability; and (4) the sector's stable, low-cost deposit base and ample liquidity, Global Arab Network reports according to press release.
However, Moody's says that these system-wide strengths will remain counterbalanced by structural weaknesses -- high loan and deposit concentrations and the financial opacity of certain family conglomerates
-- over the 12-18 month outlook period.
Moody's expects real GDP growth of 6% in 2012, one of the highest rates in the GCC. In Moody's view, economic activity and banking-system credit growth will be supported by the positive effects of high government spending and increased private-sector business activity.
This, in turn, will drive a moderate improvement in the banks' asset quality. Moody's expects problem loans (defined as loans overdue by 90
days) to gross loans to decline below the December 2011 level of 3.0%.
However, Moody's says that asset quality remains exposed to event risks, due to the continued high, albeit declining, single-party exposures in the banks' loan books. Over the outlook period, the corporate sector will also remain susceptible to vulnerabilities, including the relatively low transparency of family-owned conglomerates and the frequent intermingling of risky investment activities with operating activities that are typically more stable.
Moody's says that the prevalence of non-interest-bearing deposits and good operational efficiency will also continue to support Saudi banks'
high profitability. As a result of their high profitability, Moody's expects that Saudi banks will continue to maintain robust internal capital-generation, allowing them to absorb substantial losses without eroding capital.