Arab News, Tuesday, Jul 16, 2024 | Muharram 10, 1445

Kingdom's banks lead GCC in credit quality

Saudi Arabia:

RIYADH: Saudi banks showcased a notable improvement in credit quality in the first three months of the year as the non-performing loan ratio decreased to 1.4 percent, according to data from the Saudi Central Bank.

The bank, known as SAMA, presented figures that reflect a decline from 1.7 percent in the same period in 2023 and is credited to stronger risk profiles, underscoring the banking sector’s dedication to robust financial practices and effective risk management.

The NPL ratio measures the proportion of a bank’s gross loans that are not generating income because the borrowers have failed to make scheduled payments for a certain period, typically 90 days or more past due.

A lower NPL ratio to gross loans suggests healthier asset quality, suggesting that a smaller percentage of loans are at risk of default. As a percentage of capital, it indicates a more robust capital buffer to absorb potential losses without compromising the overall capital base.

The SAMA data also indicated that Saudi banks have improved their capacity to absorb potential losses from bad loans, as evidenced by the NPL ratio net of provision to capital decreasing from 2.6 percent to 2.2 percent during this period.

In May, Fitch Ratings observed that Saudi banks generally possess the strongest risk profiles among lenders in the key Gulf Cooperation Council markets, supporting their asset quality.

GCC banks’ primary focus on lending underscores the significant role of credit risks, which assess the likelihood of borrowers defaulting, thereby shaping their overall risk profiles.

Saudi banks experienced robust lending growth, approximately double the GCC average from 2022 to 2023, driven by increased government spending and strong non-oil gross domestic product development, the agency noted.

Nevertheless, the Kingdom maintains a healthier loan portfolio with fewer loans at risk of default, which is a result ofeffective risk management strategies, stringent lending standards, and potentially less exposure to high-risk sectors or borrowers.

Globally, Saudi Arabia’s banking system is also recognized for its high levels of capitalization under a strong regulatory framework.

It also stands out as one of the few countries fully compliant with Basel IV regulations, which mandate specific leverage ratios and require banks to maintain designated reserve capital, as reported by the agency in February of 2023.

According to the agency, factors contributing to more robust risk profiles for Saudi banks include SAMA’s reputation as the region’s strictest and most prudent banking regulator.

From 2019 to 2023, the sector cost of risk in the Kingdom averaged 0.6 percent, which is lower than the average costs observed in the UAE, Qatar, and Kuwait, Fitch noted in its February report.

Additionally, the combined ratio of Stage 2 and Stage 3 loans, which indicates potential credit impairments, stood at 7.2 percent, marking the lowest among these four GCC markets. Additionally, they benefit from a larger and more diversified economy and strong retail financing from 2021 to 2023, which reduces borrower concentration.

On average, the 20 largest exposures at Saudi and Kuwaiti banks account for about 20 percent of their loan books, compared to approximately 35 percent at UAE and Qatari banks.

Furthermore, Saudi banks extend lower levels of financing to companies owned or managed by high-net-worth individuals, including royal family members, compared to some UAE and Qatari banks.