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S&P's: Saudi banks 'most profitable in world'

Friday 22 July 2011 - by Jacqui Street

Rating agency Standard and Poor's has reaffirmed its positive outlook for Saudi banks which it says continue to be amongst the most profitable in the world.

In a report published on Friday, S&P's said banks in the Kingdom of Saudi Arabia are enjoying high profits, fuelled by high oil prices, low funding costs and a tax-free environment.

S&P's credit analyst Nicholas Hardy says the prospects for Saudi banks are bright.

"Through a unique combination of supportive features, the Saudi banks we rate continue to demonstrate their ability to generate solid, sustainable core earnings, in turn fuelling high profits."

S&P's says that although Saudi banks operate in a potentially volatile environment with "geopolitical risks and challenges", they are supported by the Saudi government which has a solid AA-/stable/A-1+ credit rating and is embarking on "vast" spending plans.

The rating agency also praises the prudential initiatives introduced by the Saudi Arabian Monetary Agency which has prompted the banks to strengthen their risk management practices and move towards "plain vanilla domestic banking activities".

"These cushions and the banks' resilient revenue generation underpin their credit quality, in our view enabling them to face both expected and unexpected losses," says the report.

But Gulf analysts are warning that the banking sector lags behind other sectors such as construction in the region.

Analysis this week from the Gulf Investment Corporation says the Kingdom of Saudi Arabia's "buoyant" economic growth at 7.5 per cent is expected to continue this year, although it is overshadowed by the 15 per cent growth rate of Qatar.

The GIC says the expansive fiscal policies of governments and high oil prices are contributing to strong growth in the region, but the financial sector is less buoyant.

"Credit expansion remains sluggish" the GIC reports, despite fairly strong capitalisation rates and profitability of banks in Qatar and Saudi.

"As well, issues of asset quality remain downside risks for some GCC banks and the sector remains subject to strong transmissions internationally and regionally."

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