Saudi banks profit to grow on lower provisioning: Moody's

The additional provisioning requirements for Saudi banks under IFRS 9 standards will remain "modest" in 2018 and result in higher net profits due to gradual economic recovery, Moody's Investors Service said in a new report.

"Following the additional provisioning efforts required by IFRS 9 implementation, we do not expect any further material increase in impairment charges through the remainder of the year, auguring well for banks' 2018 net profits," it noted.

Net impairment charges at Saudi banks fell 21 percent year-on-year and 47 percent quarter-on-quarter as of March 2018, resulting in impairment charges of 12 percent of banks' pre-provision income in the first quarter, down from 15 percent a year earlier. The impairment reduction contributed to a 7.5 percent year-on-year increase in quarterly net profit.

In 2016 and 2017, net impairment charges rose by 50 percent and 3.5 percent, respectively, due to rising asset quality pressures in the context of subdued economic growth and fiscal consolidation measures.

According to Moody's, the implementation of IFRS 9 provisioning rules led to a capital hit of SAR 14.7 billion ($3.9 billion) for Saudi banks but they continue to retain “very strong capital buffers.”

Meanwhile, the fully loaded effect of IFRS 9 is likely to bring the average Tier 1 ratio to 17.6 percent from 18.3 percent at the end of 2017.

While the Saudi Arabia Monetary Authority (SAMA) allows the banks to spread the capital hit from IFRS 9 through 2023, only three banks experience a capital impact greater than 100 basis points of their Tier 1 ratio as of December 2017.

The three banks are Al Rajhi Bank, Bank Aljazira, and Samba Financial Group, Moody’s added.