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April 3, 2016, 10:30 | Dubai
The drop in oil prices has a marked and lasting impact on Saudi Arabia’s fiscal and economic indicators, resulting in difficult operating conditions for the banking sector. Given the limited business sector diversification in the Saudi economy and the small number of large corporations, Saudi banks are exposed to structurally high concentration risk, Standard & Poor’s (S&P) has said.
“We expect credit conditions for Saudi banks will deteriorate through a correction cycle, leading to increased nonperforming loans and credit losses, as well as a decline in profitability. Consequently, we think that the economic risks for banks based in Saudi Arabia have increased,” the ratings agency said. “We also see increasing industry risk for Saudi banks, based on our view that banks will have lower capacity to generate earnings to cover risks, at a time when they will continue to support infrastructure projects and the real estate sector, which could be affected by the current difficult operating environment. Still, our view on the framework of the Saudi regulator, the Saudi Arabian Monetary Agency, as conservative; and the funding support domestic banks derive from a large, low-cost customer deposit base remain strong mitigating factors.”