Fitch: Tougher Operating Environment Challenges Saudi Islamic Banks

30 November 2016
Link to Fitch Ratings' Report: Saudi Arabia Islamic Banks Dashboard

Fitch Ratings-Dubai- Fitch Ratings says in a new report that a tougher operating environment is continuing to challenge Saudi Islamic banks. Sustained low oil prices have taken their toll on economic growth and government spending, which is affecting certain sectors, especially those dependent on government spending, such as contracting.

Asset-quality metrics are therefore likely to deteriorate from their current strong position, especially in light of slowing Islamic financing growth, and their high exposure to cyclical sectors, such as contracting and retail, which seasons more quickly.

Liquidity has now stabilised with the recent government injection of liquidity and slower demand for financing. However, profitability is likely to come under pressure due to slower financing growth.

Islamic finance is a mature and developed industry in Saudi Arabia, representing about two-thirds of total bank financing at end-1H16.

Islamic banks accounted for about 43% of the sector at end-1H16, up from 36.6% in 1H15 and 42% at end-2015 and the Islamic windows of conventional banks were 24%, up from 18.6% in 1H15 but unchanged from 2015. There are 12 licensed commercial banks in Saudi Arabia. Four are fully sharia-compliant, with the rest providing a mix of sharia-compliant and conventional banking products and services.

Al Rajhi Bank is the largest Islamic bank in the world, with assets of SAR331.4bn (USD88bn) at end-1H16. National Commercial Bank (NCB) is aiming to convert to full sharia compliance following its initial public offering in 2014. NCB's financing book is already majority sharia-compliant and once the bank is fully compliant it could replace Al Rajhi Bank as the world's largest Islamic bank. NCB has a large investment portfolio, which would be challenging to convert into sharia-compliant securities. Consequently, it may significantly reduce this portfolio.

The performance and credit matrices of Islamic and conventional banks are similar in many ways due to the largely Islamic finance nature of the lending market in Saudi Arabia (for more information on Saudi banks see Saudi Banks: Peer Review on www.fitchratings.com).

The full report, Saudi Arabia Islamic Banks Dashboard, is available at www.fitchratings.com or by clicking the link above.

Contact:

Bashar Al Natoor

Global Head of Islamic Finance

+971 4 424 1242

Fitch Ratings Limited

Al Thuraya Tower 1

Office 1805

Dubai Media City

Redmond Ramsdale

Senior Director

+971 4 424 1202