Saudi Banks Lead GCC Counterparts in Asset Quality and Risk Profiles, Says Fitch Ratings
In a recent statement, Fitch Ratings revealed that Saudi banks outperform their Gulf Cooperation Council (GCC) counterparts when it comes to risk profiles and asset quality.
The credit rating agency highlighted a strong correlation between asset quality and risk profile scores among regional banks, particularly in the GCC. Saudi banks have a weighted-average risk profile score slightly below “bbb+” and a similar asset quality score.
On the other hand, banks in the UAE, Qatar, and Kuwait have both weighted-average scores two notches lower, at “bbb-.”
Despite experiencing double the credit growth of the GCC average between 2022 and 2023, Saudi banks continue to maintain stronger scores. This growth is attributed to increased government spending and robust non-oil gross domestic product growth.
However, banking assets in Saudi Arabia remained at 99 percent of GDP by the end of 2023, contrasting with figures of 206 percent in the UAE, 240 percent in Qatar, and 159 percent in Kuwait.
The stronger risk profiles of Saudi banks are reflected in their asset quality metrics. From 2019 to 2023, the sector’s cost of risk averaged 60 basis points, lower than the averages observed in the UAE, Qatar, and Kuwaiti banking sectors.
Additionally, the combined Stage 2 and 3 loans ratio of 7.2 percent was the lowest among the four markets.
Fitch’s evaluation of Saudi banks’ stronger risk profiles acknowledges their conservative underwriting standards and risk controls. The agency also recognizes the Saudi Central Bank (SAMA) as the region’s strictest and most prudent banking regulator.
Saudi banks have less borrower concentration compared to UAE and Qatari banks, but a similar level to Kuwaiti banks. This is attributed to a larger and more diversified economy and strong retail financing.
Moreover, Saudi banks extend lower levels of financing to companies owned or managed by high-net-worth individuals compared to certain UAE and Qatari banks.
The exposure of Saudi banks to real estate and construction companies has increased to 15 percent of gross sector financing by the end of the first quarter of 2024, up from 12 percent at the end of 2021. This trend is expected to continue as non-oil sectors expand.
While Saudi banks’ real estate financing proportion now resembles that of Qatari and UAE banks, it remains below the average for Kuwaiti lenders, standing at 24 percent of gross loans as of the end of 2023.
Fitch views high exposure to real estate financing as a weakness for GCC banks’ risk profiles and asset quality, as these exposures are mostly long-term and non-amortizing. Potential difficulties in realizing underlying collateral or repossessing prime residences can also impact Fitch’s assessment of the exposures.