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Saudi Economic Slowdown Raises NPL Risk

Saudi Economic Slowdown Raises NPL RiskSaudi Economic Slowdown Raises NPL Risk

The liquidity of Saudi Arabian banks has improved since last year, but a slowdown in the kingdom’s economy would likely cause a rise in non-performing loans, Fitch Ratings said.

Most of the public-sector deposits that were drained from the banking system last year due to a weakness in oil prices have since returned and the government has already paid most its overdue payments to contractors, the ratings agency said, Reuters reported.

“Funding costs, which spiked during the 2016 tightening, have fallen back toward the very low levels to which most Saudi banks had become accustomed,” Fitch Ratings said.

Fitch Ratings said that most Saudi lenders had liquidity coverage ratios above 200% during the end of the first half, which it viewed as “strong”.

“Another wave of government deposit withdrawals is less likely now that Saudi Arabia is partly financing its fiscal deficit with international sovereign debt issuance.”

The kingdom raised $12.5 billion from international investors last month, the third time it has accessed global bond markets in less than a year. It sold $17.5 billion worth of conventional bonds last October and in April the kingdom issued a $9 billion Islamic bond.

“We expect a rise in the sector’s NPL ratio and muted credit demand in the second half of 2017 and 2018, reflecting the slowing economy,” according to Fitch Ratings, with GDP growth expected to further weaken to below 1% this year and in 2018, from 3.4% in 2015 and 1.4% last year.

Despite expectations of higher non-performing loans, Fitch Ratings said that Saudi lenders would remain aptly covered as NPL levels would be very “low by global standards and loan-loss coverage is strong.”

Meanwhile, Saudi Arabia’s central bank is preparing tougher rules for insurance companies as part of a drive to create a smaller number of stronger market players operating in the country, two people with direct knowledge of the matter told Reuters.

A new supervisory framework will be introduced in the coming months that will force insurers to boost capital significantly as well as improve internal risk controls, said the sources, who declined to be named due to the sensitivity of the matter.

The moves are aimed at triggering consolidation in the insurance industry and forcing weaker companies to merge with stronger ones, industry analysts said.

 “They (central bank officials) said half of the companies that are here today will not be here,” one of the sources said. “They want stronger companies in the market.”

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