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Pressure on Saudi banks may affect sovereign rating

The Saudi banks operational plan has been living through a difficult reality since the beginning of this year, due to several reasons, most notably the Coronavirus pandemic and significant oil prices drop during 2020.

The deteriorating economic reality of Saudi banks has increased pressure on the quality and profitability of this sector’s assets.

The quality of the bank’s assets is usually evaluated through several criteria such as profitability, risk, liquidity and diversification.

Retail loans rise

During the first ten months of the year 2020, individual loans grew by 12.7% — a high rate in light of the continuing momentum in individual mortgages.

The negative outlook for the classification of the Saudi banking sector reflects the increasing pressure on the operating environment of these banks, which may harm the sovereign rating and solvency of Saudi Arabia during the coming period.

Despite the negative expectations, Saudi banks rating remains at BBB+, which is a good sign despite the bad condition of the world’s economies.

Government support and high growth before the Coronavirus pandemic, gave asset quality indicators in the Saudi banking sector stability during the first nine months of 2020.

However, many companies defaulting, along with a weak operating environment, will undoubtedly undermine this stability.

It should be noted that the banking sector in Saudi Arabia still enjoys capitalization, which is the large expenditures that are charged to the capital and lead to an increase the life or productivity of the asset.

Also, the Saudi banks’ large liquidity is still the biggest supporter of the sector in light of the pandemic which is still greatly affecting the economy.

Impact on oil prices

Oil prices were greatly affected by the closure of the world’s economies to confront the Coronavirus.

Oil barrel price reached low levels, reaching to about $18, before recovering becoming at about $46 now.

The Saudi economy relies heavily on its oil exports, and thus the state budget is affected with any decrease in the price of the “black gold”.

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