JEDDAH — The outlook for Saudi Arabia's banking system remains stable, said Moody's Investors Service in a new Banking System Outlook published Monday. The key drivers of the outlook are a benign operating environment; low problem loan levels; strong loss-absorption capacity, underpinned by high capital buffers and solid profitability; and the sector's stable, low-cost deposit base and ample liquidity. However, Moody's said these system-wide strengths will remain counterbalanced by structural weaknesses -– high loan and deposit concentrations and the financial opacity of certain family conglomerates – over the 12-18 month outlook period. Moody's noted that the prevalence of non-interest-bearing deposits and good operational efficiency will also continue to support Saudi banks' high profitability. As a result of their high profitability, Moody's expects that Saudi banks will continue to maintain robust internal capital-generation, allowing them to absorb substantial losses without eroding capital. Moody's expects real GDP growth of 6 percent in 2012, one of the highest rates in the GCC. In Moody's view, economic activity and banking-system credit growth will be supported by the positive effects of high government spending and increased private sector business activity. This, in turn, will drive a moderate improvement in the banks' asset quality. Moody's expects problem loans (defined as loans overdue by 90 days) to gross loans to decline below the December 2011 level of 3.0 percent. However, Moody's said asset quality remains exposed to event risks, due to the continued high, albeit declining. – SG
