RIYADH - Banks in Saudi Arabia have been resilient amid the global recession and the debt problems of a few family-owned conglomerates will not trigger credit rating downgrades, according to Standard & Poor's."The outlook for all Saudi banks, with one exception, is stable," Emmanuel Volland, senior director of financial services at Standard & Poor's Rating Services, said in an interview. "This suggests that we don't expect significant negative rating actions in the next two years," which is the firm's timeframe for outlooks.
The debt problems of the two Saudi conglomerates, Saad Group and Ahmad Hamad al Gosaibi & Brothers Co., which borrowed $9.6 billion from banks in the Gulf (according to S&P) and a similar amount from international lenders, was "not material enough to trigger any action" for Saudi banks, Volland said.
Saad Group's deal with local banks in September to settle 9.7 billion Saudi riyals ($2.59 billion) for its outstanding loans has cut exposure to the troubled firms by half, and improved the profitability outlook for the sector.
Lenders in the oil-rich kingdom did not experience the crippling wave of losses when the global financial system nearly collapsed last year. Profits have declined, but much less than the rest of the world. Net profit for the first nine months of 2009 for the sector declined 9% to SAR23.22 billion, according to central bank data.
In terms of earnings capacity "Saudi banks are among the most profitable in the region - probably the world," Volland said.
While a return to the years of rapid growth when profits nearly tripled between 2002 and 2006 isn't likely, the low cost of labor and deposits could help fuel strong growth compared to other markets.
Saudis shun interest-bearing accounts--adhering to Islam's ban on usury, more so than in other Muslim countries in the region. More than 40% of bank deposits don't pay out interest to customers, a "unique feature" in Saudi Arabia, Volland said.
And the cost of labor, measured by the cost-to-income ratio, is at 25% in Saudi Arabia compared to 60% to 70% in the U.S. and Europe, he added.
Lenders have been reluctant to extend credit this year, and generally reduced risk or booked losses in their loan books and investments as the economy shrank. Volland expects non-performing loans to increase over the next three quarters from 2% of total loans to as much as 4%.
"This is very different than Kuwait, where some banks have much higher NPLs [non-performing loans]," he said.
The deterioration of asset quality is a concern, but the sector's strong fundamentals position banks to take advantage of an economic rebound, especially as the government doles out $400 billion on new infrastructure by 2013.
"Banks are talking about getting back gradually to lending, but there has been a shift in risk appetite" that will linger for some time, Volland said.