Saudi Banks Lead in Risk Profiles Among GCC Lenders

Fitch Ratings reports that Saudi banks exhibit the strongest risk profiles and asset quality among major Gulf Cooperation Council (GCC) markets, driven by conservative underwriting standards and prudent risk controls.

Fitch’s analysis highlights that GCC banks primarily focus on lending, making credit risk a significant factor in their risk profiles. Saudi banks achieved a weighted-average risk profile score just below ‘bbb+’ and an asset quality score of ‘bbb+’. In contrast, banks in the UAE, Qatar, and Kuwait scored two notches lower, at ‘bbb-’ for both metrics.

Despite a credit growth rate double the GCC average in 2022-2023, fueled by increased government spending and robust non-oil GDP growth, Saudi banking system assets were 99% of GDP at the end of 2023. This compares to 206% in the UAE, 240% in Qatar, and 159% in Kuwait.

Saudi banks maintained lower cost of risk averages (60 basis points from 2019-2023) and the lowest combined Stage 2 and 3 loans ratio (7.2%) among the four markets. These metrics underscore the stronger risk profiles of Saudi banks, supported by the stringent regulatory oversight of the Saudi Central Bank (SAMA).

Borrower concentration is lower in Saudi banks compared to those in the UAE and Qatar, attributed to Saudi Arabia’s larger, diversified economy and strong retail financing from 2021-2023. The 20 largest exposures at Saudi and Kuwaiti banks account for about 20% of their loan books, versus 35% at UAE and Qatari banks.

Real estate and construction sector exposure for Saudi banks rose to 15% of gross sector financing by the end of Q1 2024, up from 12% at the end of 2021. This trend is expected to continue as non-oil sectors expand. Despite the increase, Saudi banks’ real estate financing is comparable to that of Qatari and UAE banks and remains below the 24% average for Kuwaiti banks as of the end of 2023.

Fitch notes that high exposure to real estate financing can weaken GCC banks’ risk profiles and asset quality due to the long-term, non-amortising nature of these loans and potential difficulties in collateral realization or repossession.