Standard & Poor’s has downgraded the credit ratings of eight Saudi Arabian banks it covers, less than a week after it reduced the country’s sovereign rating one notch to A+, the fifth-highest classification, saying Saudi’s deficit will increase to 16% of GDP in 2015.
The National Commercial Bank, Al Rajhi Bank, Samba Financial Group, The Saudi Investment Bank, Riyad Bank, Banque Saudi Fransi, Arab National Bank and the Saudi British Bank were the banks placed on negative outlook. This means that S&P will assess whether to further cut their credit ratings within the next 24 months, as low oil prices threaten to imperil the health of their balance sheets.
“Increased economic risks follows the marked deterioration in Saudi Arabia’s fiscal balance after the sharp drop in oil prices and its expected effect on the Saudi economy and domestic banks,” S&P said.
“We expect to see lower business volumes, higher cost of risk, weaker profitability and slower growth of deposits in the banking system. At the same time, we believe that Saudi banks have good cushions to limit the impact of this new operating environment.”
The decline in oil prices over the last year has slowed growth throughout the MENA region. In Saudi, the oil sector of which represents ~90% of the economy, depressed prices have slowed revenues accruing to the Saudi government and government-related agencies. This in turn has yielded a slowdowns in public sector deposit growth, as the country deposits fewer funds or liquidates fewer deposits at Saudi banks.
Earlier this week, Fitch ratings agency placed Arab National Bank, Saudi British Bank, and Banque Saudi Fransi on negative outlook. Fitch cited “a tougher operating environment” and depressed oil prices as the rationales for its decision. Fitch previously downgraded National Commercial Bank, Al Rajhi, Riyad Bank, and Samba.
Fitch said in a Tuesday note that the Saudi government was almost guaranteed to step in case of stress in the financial sector. This confident prognostication lent support to the aforementioned banks’ credit ratings.
Saudi Arabia is projected to run a fiscal deficit of $110 billion in 2017. That represents 17% of its GDP, according to Moody’s Investors Service. Moody’s hasn’t cut Saudi Arabia and has thus far left the credit ratings of the Saudi banks it watches untouched.
In response to the S&P’s downgrade last Friday, the Saudi Finance Ministry said “strongly disagrees with S&P’s approach to ratings management in this particular instance.” Further, the credit rating cut was “driven by fluid market factors rather than changes in the fundamentals of the sovereign,” which “remain strong,” the ministry said in a statement on Saudi Press Agency’s website.
The fall in oil prices comes amid the opening of Saudi Arabia’s stock market to foreigners for the first time. In June, the country eased regulations to enable investors to have direct access to stocks as part of broader government attempts to decrease the economy’s reliance on oil.
S&P estimates that Saudi’s general government deficit will fall to 10% of GDP next year, 8% in 2017 and 5% in 2018. The deficit could increase to more than 20% this year following King Salman’s decision to provide one-time bonuses for public-sector employees after his accession to the throne early this year, the IMF said in October.
Earlier this week, Bank of America Merrill Lynch said that Saudi Arabia confronts an “elevated” risk of another credit rating cut by Standard & Poor’s as the country continues to struggle with low oil prices.
The largest economy in the Arab world could be depleted of the financial assets required to support spending within five years if the government maintains existing policies, the IMF also reported.