The banking sectors in Saudi Arabia and the UAE face contrasting liquidity dynamics, according to a new report by Fitch Ratings. 

 

Saudi banks’ funding costs will ease due to last month's SR50 billion ($13.3 billion) of liquidity injections from Central Bank of Saudi Arabia which is more likely to follow to support strong loan growth, while the UAE liquidity conditions are more supportive, helped by modest loan growth. 

 

The contrast in liquidity conditions is illustrated by the sector loan-to-deposit ratios, with the Saudi ratio at its highest level for at least 15 years and the UAE ratio at its lowest level for more than a decade, stated the top ratings agency in the report.

 

Fitch expects higher oil prices and rising interest rates to lead to strengthening profitability for both Saudi and UAE banks in 2022–2023. 

 

It calculates that a 200bp increase in interest rates would boost Fitch-rated Saudi banks’ operating profit by 14%, and their operating profit/risk-weighted assets ratio (our core profitability metric) by 50bp, on average, based on the banks’ 2021 interest-rate sensitivities. For Fitch-rated UAE banks, the respective figures are 11% and 40bp," stated F.

 

The average net interest margin (NIM) for Fitch-rated UAE banks contracted by 50bp during the last monetary tightening cycle in 2015–2018, due to tight liquidity conditions. 

 

"However, liquidity conditions are considerably more favourable this time, underpinned by the higher oil prices, and we therefore expect UAE banks’ NIMs to widen in 2022–2023," stated Fitch in its report.

 

UAE banks’ higher proportion of variable-rate mortgages means they can reprice loans faster than Saudi banks when interest rates rise. Partly offsetting this relative disadvantage, Saudi banks have a higher proportion of low-cost current-account or savings account (CASA) deposits, which will not require significant increases to the interest rates paid to customers, it added.