Non-performing loans (NPLs) in Saudi Arabia’s construction sector are set to rise, leading to higher provisioning costs for the nation’s banks, according to a new report from Moody’s.
In its 18 October analysis, the ratings agency says that two years of fiscal consolidation and slowed economic activity – both stemming from a low oil-price environment – have ramped up pressure on the Saudi building trade.
Indeed, it notes, Saudi banks’ exposure to construction jumped by an alarming 19.7% in the year up to June 2016.
That is well above 8.9% rise in total bank credit over the same period, and a major material contributor to the sector’s current indebtedness.
NPLs associated with Saudi construction are already higher than in any other sector, reaching 3.1% of gross loans by year end 2015 – up from 2.8% the year before – versus a total, reported NPL ratio of 1.2%.
Moody’s vice president and senior credit officer, Olivier Panis, said: “We expect the pressures to continue as the Saudi government aims to reduce its large fiscal deficit.
“As a result, the building and construction sector will likely contribute materially to the increase in NPLs at Saudi banks – we expect them to rise to around 2.5% of gross loans in 2017, from around 1.5% estimated as of June 2016.”
He added: “The building and construction sector in Saudi Arabia is already the main contributor to NPL formation at Saudi banks over the past five years, and we expect this will remain the case in the coming quarters.
“This is indicated by the increasing proportion of NPLs in this segment, accounting for SAR4.1bn or 27% of system NPLs as of year end-2015 – up from SAR1.9bn, or 8% of system NPLs, as of year end 2010.”
Announcing the report’s publication, Moody’s sought to offer banking stakeholders a measure of reassurance.
“While we expect Saudi banks to face increased problem loans and higher provisioning costs over the next 12 months,” the agency said, “we expect the magnitude of the asset quality deterioration to be within the banks’ profit margins.”
Furthermore, it pointed out, banks’ high capital buffers “can absorb a material stress from downside scenarios in the building and construction sector.
“Loan-loss provisions are strong, representing around 178% of reported NPLs. Capital adequacy ratio and Tier 1 ratio stood at 18.3% and 16.4%, respectively, as of June 2016.”
The ratings agency added: “All else being equal, the reported coverage ratio would still remain strong at around 150% if the NPL ratio in the building and construction sector were to increase to 4.5% from 3.1% as of year end 2015 (representing SAR1.9bn in additional NPLs).”
Moody’s subscribers can access the full report here.