Riyadh – Mubasher: Saudi banks’ profitability has been resilient and remains a strength for the sector, according to a recent report by Fitch Ratings.

Profitability is underpinned by strong franchises, cheap funding, and limited competition, despite a soft operating environment and subdued economic growth, which are challenges to credit demand as the economy remains highly dependent on oil exports, despite the government's diversification efforts, the report noted.

The Saudi banking sector is well capitalised, with one of the highest weighted average common equity Tier 1 ratio globally. “Strong capital ratios reflect stiff regulatory requirements and benefit from low growth and strong profitability. Nevertheless, we believe high capital ratios are necessary due to high concentration levels.

“Fitch considers Saudi banks' balance sheets to be very liquid, with high-quality liquid assets accounting on average for 22% of total assets, partly as a result of limited growth opportunities, and covering 31% of deposits,” the report further noted.

A weak pipeline of government infrastructure projects, modest real GDP growth forecasts, low consumer confidence, fiscal tightening, and geopolitical tensions were identified by the report as threats to credit growth.

The rating agency indicated that the sector’s performance metrics improved in 2018 on the back of rate hikes by the US Federal Reserve but this trend is likely to reverse and that asset quality metrics continue to be impacted by weak consumer confidence and low credit demand, non-performing loan ratios have been rising but continue to compare very well by international standards.