Saudi Banking: An Expert View

Redmond Ramsdale, head of Middle East bank ratings at Fitch Global Ratings, explains the 2020 outlook for the Saudi banking sector.

Global Finance: How do you see the Saudi banking sector evolving?

Ramsdale: Fitch’s 2020 sector outlook for Saudi banks is stable, supported by continued high levels of liquidity. Growth opportunities for banks will be limited in 2020 by weak demand for credit that will continue to suffer from low confidence levels, geopolitical risks and the slow pipeline of government projects. Banks will continue to build capital and liquidity buffers for growth. We expect banks to remain highly profitable in 2020 despite the challenging operating environment.

GF: What are some of the reasons for this?

Ramsdale: This expectation reflects a favorable market structure with only 12 domestically licensed banks for a population of about 30 million, and good banking penetration. Low funding costs are supported by a high proportion—about 60%—of non-interest-bearing deposits in the system, and deposits account for over 90% of non-equity funding which is the highest in the GCC. Despite high concentration, we expect deposits to be sticky.

Fitch expects non-performing loans to see mild deterioration in 2020, particularly in the auto, retail and property sectors with the reduction in the number of expatriates, but high loan-loss allowance coverage and capital buffers for most banks provide sound protection. Fitch expects banks to remain well capitalized despite high dividend payouts, reflecting already strong buffers. We believe large capital buffers are necessary due to high concentration levels. We expect strong liquidity buffers to be maintained, which help manage shocks and mitigate risks from funding concentrations.