Article details
Fitch Ratings has warned that prolonged or severe escalation in the Iran conflict could pressure Saudi banks' asset quality, profitability, and liquidity. The report highlights that while Saudi banks currently have strong buffers, a prolonged conflict could lead to viability rating (VR) downgrades. All 11 rated Saudi banks' Issuer Default Ratings (IDRs) are tied to government support, making them sensitive to sovereign creditworthiness. A sovereign downgrade would likely trigger bank IDRs downgrades. Fitch's adverse scenario includes slower credit growth, lower non-interest income, and higher inflation, which could compress net interest margins and increase impairment charges.
The analysis underscores the interconnectedness between Saudi banks and government policy. A prolonged conflict could strain liquidity, particularly for Al Rajhi, Riyad Bank, and Bank Albilad, whose liquidity coverage might fall below 10% under stress. However, the Saudi Central Bank (SAMA) has tools like repo facilities to mitigate risks, as seen in past crises. The report also notes SAR450 billion in government-related deposits at SAMA, which could be redirected to banks if needed.
For traders, the focus should be on SAMA's interventions and liquidity coverage ratios. A sovereign downgrade or prolonged conflict could signal broader economic stress, affecting bank valuations in the Tadawul. Investors should monitor geopolitical developments and SAMA's policy responses to gauge risks to the banking sector.
