Saudi Banks Strengthen Credit Quality in Q1
In the first quarter of the year, Saudi banks have shown remarkable improvement in credit quality, with the non-performing loan ratio dropping to 1.4 percent, according to data from the Saudi Central Bank, also known as SAMA.
This decline from 1.7 percent in the same period last year is attributed to stronger risk profiles, highlighting the banking sector’s commitment to sound financial practices and effective risk management.
Understanding the NPL Ratio
The NPL ratio measures the proportion of a bank’s gross loans that are not generating income due to borrowers failing to make scheduled payments for a certain period, usually 90 days or more past due.
A lower NPL ratio indicates healthier asset quality, with a smaller percentage of loans at risk of default. It also signifies a more robust capital buffer to absorb potential losses without impacting the overall capital base.
Robust Capitalization and Regulatory Compliance
Saudi banks have improved their ability to handle potential losses from bad loans, as seen in the NPL ratio net of provision to capital decreasing from 2.6 percent to 2.2 percent in the recent period.
Recognized for their strong risk profiles, Saudi banks are among the leading lenders in the Gulf Cooperation Council markets, as noted by Fitch Ratings in May.
The Kingdom’s banking system is globally acknowledged for its high levels of capitalization and compliance with Basel IV regulations, ensuring a strong regulatory framework.
Strategic Risk Management and Sector Comparisons
Saudi Arabia’s banking sector benefits from effective risk management strategies, stringent lending standards, and limited exposure to high-risk sectors or borrowers, resulting in a healthier loan portfolio.
Comparatively, the sector cost of risk in the Kingdom is lower than in the UAE, Qatar, and Kuwait, with a combined ratio of Stage 2 and Stage 3 loans standing at 7.2 percent, the lowest among these GCC markets.
Saudi banks also exhibit lower levels of financing to high-net-worth individuals and royal family members, enhancing their risk profiles and diversifying their lending portfolios.