Saudi banks resilient despite lower oil prices
Beirut - Lower oil prices will soon start to weigh on Saudi Arabia’s banks, which are likely to see the percentage of poor-performing loans edge higher by the end of the year, according to Standard & Poor’s (S&P). However, Saudi bankers seem to count on the sector’s ability to sustain the resiliency it showed in recent years.
“Over the past few years, we have seen a stabilisation in asset quality and it has been a story of declining credit losses. But we now believe that through the end of this year, we will begin to see credit losses picking up,” Timucin Engin, a banking analyst at S&P, wrote on September 2nd.
Lenders in the kingdom have managed to defy many analysts’ expectations by posting generally healthy results, despite the roughly 60% slide in oil prices since June 2014. The ratings agency said it usually takes a few quarters for asset quality issues to surface in a less resilient economy.
S&P’s hinting that Saudi Arabia’s economy is among the more resilient economies is what the kingdom’s lenders count on. “Saudi banks have around $120 billion in available liquidity, including their investments abroad. If bad loans do arise, as S&P expects, the liquidity is more than enough to take care of the matter,” a leading Saudi banker told The Arab Weekly.
The banks’ non-performing loans stood at 1.2% of total loans in the first quarter, up from 1.1% in 2014, according to data from the Saudi Arabian Monetary Agency, the central bank. That is down from a peak of 3.3% in mid-2010 when the kingdom’s financial sector suffered fallout from the global financial crisis.
“This is more reason to believe that the Saudi banking system is capable of fending off any fallout from lower oil prices,” the banker said, speaking on the condition of anonymity.
S&P said long-term data suggested a clear link between non-performing loans and oil prices. After oil prices fell about $30 per barrel in late 2008, the ratio of bad loans more than doubled in subsequent months, data indicated. The link is likely to be reinforced if, as expected, the government begins to slow spending, pumping less money into the economy.
Still, analysts are not overly worried about the health of the Saudi banking sector, as the regulator requires lenders to keep coverage ratios well above the requirements proposed by Basel III and requires banks to make provisions for loans before they sour. “Banks are cognizant of this [rising credit losses] and we would expect a gradual pickup in provisions,” said Suha Urgan, another banking analyst at S&P.
Meanwhile, the International Monetary Fund (IMF) warned that lower prices of commodities, including oil, might keep world economic growth moderate.
“Global growth remains moderate, reflecting a further slowdown in emerging economies and a weak recovery in advanced economies. In an environment of rising financial market volatility, declining commodity prices, weaker capital inflows and depreciating emerging market currencies, downside risks to the outlook have risen, particularly for emerging markets and developing economies,” it said in a note presented September 3rd to Group of 20 finance ministers and central bank governors.
Financial leaders from the world’s 20 biggest economies agreed to step up reform efforts to boost disappointingly growth, saying reliance on ultra-low interest rates would not be enough to accelerate economic expansion. But the IMF said commodity price declines over the past year have alleviated inflation pressures and mitigated external vulnerabilities in net commodity importers while increasing external and fiscal vulnerabilities in commodity exporters.
“Oil exporters that have accumulated savings and have fiscal space can let fiscal deficits increase and allow a more gradual adjustment of public spending. For floaters with less policy space, exchange rate flexibility will be a critical buffer to the shock. This may require improving macroeconomic policy frameworks in some countries and keeping balance sheet exposures manageable,” the IMF said.
Concerning Saudi Arabia, the IMF’s message is clear. “This means Riyadh should be careful about sustaining high public expenditure, particularly if it’s going to finance it with local loans; that is, loans raised from local banks,” a Saudi private sector source told The Arab Weekly on condition of anonymity. “I don’t see imminent fiscal problems but care is advised to not expose local banks to unnecessary pressures.”
Oil prices seem poised to stay low for years, derivatives markets say, keeping a lid on inflation and helping boost global growth, Reuters reported. Oil has more than halved in value over the last year, thanks to huge oversupply, and many oil companies, particularly in the United States, say they may soon have to rein in production, tightening supply, unless the market recovers.