Rate rise a boon, says Fitch

London : Rising interest rates in Saudi Arabia’s banking sector will prove beneficial to Islamic banks this year, Fitch Rating said. In a report, the rating agency said the offsetting impact of higher funding costs will be less for Islamic banks than conventional banks - which will also get a boost - because they have a higher proportion of non-profit bearing deposits. Saudi central bank raised repo rate from 2 per cent at end-2017 to 2.25% in March and 2.5% in June. 

“We expect banking sector earnings to increase in 2018, although financing growth is likely to remain muted. We also expect Saudi banks’ capital buffers to remain strong and sufficient to absorb a potential mild deterioration in asset quality,” the statement said. Islamic banks, Fitch said, continue to outperform conventional banks, helped by lower funding costs and a higher proportion of retail financing. Islamic banks, like conventional banks, have benefitted from improved liquidity conditions. 

Last year, the Ministry of Finance established a Saudi riyal-denominated sukuk programme, which has been issuing regularly. “This is a positive development to help Islamic banks manage their liquidity,” the agency said. Saudi Arabia has the largest Islamic banks’ financing base (78 per cent) of any country that allows commercial banks to operate alongside Islamic banks. Four of Saudi Arabia’s 13 licensed commercial banks are fully sharia compliant, while the other nine provide a mix of sharia-compliant and conventional banking products and services. All banks are regulated by the Saudi Arabian Monetary Authority with the same disclosure requirements.

Saudi banks are predominantly deposit funded, with deposits representing about 90pc of funding at Islamic banks and about 94pc at conventional banks at end-2017. Islamic banks are well capitalised, with an average Core Capital ratio of 18.6pc at end-2017. “This was 70bp above conventional peers due to lower risk weightings on retail banking assets and lower off-balance-sheet activities.”