Saudi Arabia's banks are moving toward the second half of 2011 in a strong position. Saudi Arabia's financial institutions are cashed up with healthy levels of liquidity, operating in a secure and growing economy, and have shown new earnings and investment potential. Banks' fundamentals and the business environment are sound, rating agency Standard and Poor's said Friday. In a report, S&P's said banks in the Kingdom are enjoying high profits, fueled by high oil prices, low funding costs and a tax-free environment. S&P's credit analyst Nicholas Hardy said the prospects for Saudi banks are bright. "Through a unique combination of supportive features, the Saudi banks we rate continue to demonstrate their ability to generate solid, sustainable core earnings, in turn fuelling high profits," he said. Deposits held by Saudi banks rose by 11 percent year-on-year in the first three months of 2011, hitting a record high of $286 billion, and a recent report by ratings agency Fitch said that local lenders had reduced the average ratio of non-performing loans to around 2.9 percent, down from the 3.4 percent at the end of 2009. "In our opinion, the poor performance of international financial markets since 2008, local credit events in 2009, and prudential initiatives introduced by the regulator, the Saudi Monetary Agency (SAMA), have led the banks to revise their strategies in favor of plain vanilla domestic banking activities, and to strengthen their risk management practices," S&P's noted. These banks have allocated their robust operating revenues both to build up capital positions and to increase provisions for coverage of bad loans to conservative levels above 100 percent, it added. From a rating perspective, these cushions and the banks' resilient revenue generation underpin their credit quality, enabling them to face both expected and unexpected losses, S&P's said. A number of local and international agencies have upgraded their growth forecasts for Saudi Arabia, with many predicting GDP could expand by up to 6 percent or more this year, well up on the 3.8 percent that was previously tipped. At least some of this increased expansion will be driven by new spending programs unveiled by King Abdullah, Custodian of the Two Hoy Mosques, earlier this year, which will see some $13 billion of investment in infrastructure, housing, health and the social services sector. S&P's said although Saudi banks operate in a potentially volatile environment with "geopolitical risks and challenges", they are supported by the Saudi government which has a solid AA-/stable/A-1+ credit rating and is embarking on "vast" spending plans. Credit Suisse analyst Mohammad Hawa said earlier that the mortgage market will become a major driver of credit growth in a banking sector. "The largest beneficiaries of the growth in the mortgage business will be the banks with highest exposure to the retail segment," he said. "We do not foresee a general deterioration of asset quality in the near future. Because of the prolonged low interest rates, these banks have streamlined their existing sources of noninterest revenues. Consequently, the banks appear well-positioned to capture growth opportunities in the developing local retail and corporate segments and continue to post solid profit," Hardy further said.
