US-based Moody’s Investors Services has changed its Saudi banking outlook to negative after revising its expectations for GDP growth in the kingdom to slow to just 1.5 per cent in 2016.

Moody’s expects credit growth to slow to between 3 and 5 per cent in 2016, from 8 per cent in 2015 and 12 per cent in 2014.

A 13.8 per cent cut in government spending will reduce business confidence and demand for credit. Construction and building materials will be especially affected.

Credit in Saudi Arabia    
Year 2014 2015 2016 (f)
Credit growth 12 8 5
Deposit growth 12 1 1
Loan to deposit ratio 76 81  
Non-performing loan ratio 1.4 1.4* 2.5
Source: Moody’s  *as of Q3  

The central bank, the Saudi Arabian Monetary Agency (Sama) has raised the maximum loan-to-deposit ratio from 85 to 90 per cent, which will mitigate the slowdown in demand.

The non-performing loan will increase from 1.4 per cent in September 2015 to 2.5 per cent in 2016, Moody’s predicts. The ratio is still relatively low and provisioning costs are not expected to spike.

Funding will also become as issue as government deposits fall, as well as corporate profits and household savings. This will force Saudi banks to rely more on more expensive market funding, pushing up the cost of borrowing.

Public sector deposits fell by 5.7 per cent in 2015, and overall deposit growth slowed to 1 per cent, down from 12 per cent in 2014. Deposit growth is expected to remain limited in 2016.

There are also concerns over Saudi Arabia’s banks’ exposure to single parties, poor transparency in family-owned business and lending on the basis of names rather than creditworthiness. This means that the loan performance of one borrower could harm a bank’s overall asset quality.

Sama has reduced the cap on any single exposure from 25 per cent to 15 per cent of a bank’s capital and reserves by 2019. Banks’ top 20 depositors account for around a third of their total deposits on average, according to a Moody’s estimate.

However, profitability will be steady as banks invest more in the SR98bn ($26m) government bonds issued in the second half of 2015, rather than leaving excess liquidity Sama.

Overall, Saudi banks are well capitalised and profitable, but are facing a difficult operating environment while oil prices remain lower.

Moody’s also notes that a new banking law is planned, including a banking resolution regime for failing banks. This, along with the stress on Riyadh’s fiscal position, could reduce state-support for banks.