Fitch Ratings, the international rating agency, says in a Special Report published today that some Saudi banks may see positive rating actions if they continue their strong profitability and further strengthen their key credit risk indicators.
Fitch says Saudi banks will continue to be one of the main beneficiaries of a buoyant local economy, which continues to be supported by high oil prices. This, together with continuing high demand for retail loans,
increased fee (mainly brokerage) income from a booming local stock market, IPO financing and a continuation
of liquidity flowing into the region, contributed to the Saudi banks' strong 2004 results.
In the report, entitled "Saudi Banks: 2004 Annual Review and Outlook", Fitch says further strong results are
expected this year, although fee and commission income growth is expected to slow slightly as the local stock
market boom recedes. "Although there is no indication that asset quality is likely to decline in the short-term,
the banks all remain well reserved and adequately capitalised to help guard against any deterioration in the loan portfolio," says Robert Thursfield, Associate Director in Fitch's Financial Institutions team and the principal author of the report. Fitch will continue to monitor the banks' exposures to the local stock market, after its growth in value of 85% in 2004 and approximately 40% in the first quarter of 2005.
All 10 main commercial banks in Saudi Arabia reported strong results in 2004 with average net income growth of 42% year on year and an average return on equity (ROE) of 28%. Loan growth averaged 28% across the sector with the consumer loans and margin lending portfolios showing significant increases. Asset quality indicators improved in 2004 with impaired loans on average representing 3% of loan portfolios while average loan loss reserves coverage of 159%.
Capital ratios declined slightly on average in 2004 as risk-weighted assets increased, although they remain adequate with an average Tier 1 ratio of 16.5% at end-2004. Driven by rapid balance sheet growth and a need to reduce the asset/liability maturity mismatch, the banking sector has started issuing long-term debt instruments, a trend that has been evident in the wider Gulf region for a couple of years and is likely to continue.
Saudi British Bank was the first Saudi bank to do so with the issue in early 2005 of an USD600 million five-year floating-rate note under a medium term note programme, rated Long-term 'A-' (A minus).
SEE THE FEATURES SECTION FRO FULL REPORT