Saudi banks lead GCC in risk profiles, says Fitch

Saudi banks exceed their Gulf Cooperation Council counterparts in terms of risk profiles underpinning their asset quality, according to Fitch Ratings.

The credit rating agency said in a statement that there is a strong correlation between asset quality and risk profile scores among regional banks, particularly in the GCC, due to their lending-focused business models. Saudi banks boast a weighted-average risk-profile score slightly below “bbb+” and a similar asset quality score.

Conversely, in the UAE, Qatar, and Kuwait, both weighted-average scores stand two notches lower, at “bbb-.”

Despite experiencing credit growth around double the GCC average between 2022 and 2023, Saudi banks maintain stronger scores. This surge is attributed to heightened government spending and robust non-oil gross domestic product growth.

However, banking assets 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 evident 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, Qatari, and Kuwaiti banking sectors.

Similarly, the combined Stage 2 and 3 loans ratio of 7.2 percent was the lowest among the four markets.

Fitch’s assessment of Saudi banks’ stronger risk profiles reflects their generally conservative underwriting standards and risk controls.

This evaluation also acknowledges the perception that the Saudi Central Bank,  also known as SAMA, is the region’s strictest and most prudent banking regulator.

“Saudi banks have less borrower concentration than the UAE and Qatari banks, but a similar level to Kuwaiti banks, due to a larger and more diversified economy and strong retail financing in 2021-2023,” the rating agency stated.

It added: “The 20 largest exposures at Saudi and Kuwaiti banks account for about 20 percent of the loan books on average, but significantly more — about 35 percent — at UAE and Qatari banks.”          

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.

Saudi banks’ exposure to real estate and construction companies rose 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 anticipated to persist as non-oil sectors continue to expand. While Saudi banks’ real estate financing proportion now resembles that of Qatari and the UAE banks, it remains below the average for Kuwaiti lenders, standing at 24 percent of gross loans as of end 2023.

“We typically view high exposure to real estate financing as a weakness for GCC banks’ risk profiles and asset quality, as the exposures are mostly long-term and often non-amortizing with final repayment contingent upon full completion of the building,” Fitch said in the statement.

It added: “Potential difficulty in realizing underlying collateral or repossessing prime residences can also weigh on how Fitch views the exposures.”