Construction sector woes ‘pose risk to Saudi banks’

Reduced number of projects and rising debts to lead to more nonperforming loans, Moody’s warns

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The increasing number of challenges faced by Saudi Arabia’s construction sector is set to hit local banks, Moody’s Investors Service has warned.

The reduced project pipeline and rising indebtedness in the construction industry will lead to more non-performing loans and higher provisioning costs, Moody’s said.

“The Saudi construction sector has been negatively affected over the last two years by slowing economic activity and fiscal consolidation measures, stemming from a lower oil prices environment. We expect the pressures to continue as the Saudi government aims to reduce its large fiscal deficit,” said Olivier Panis, a Vice President and Senior Credit Officer for Moody’s, in a statement.

“As a result, the building and construction sector will likely contribute materially to the increase in nonperforming loans (NPLs) at Saudi banks — we expect NPLs to rise to around 2.5% of gross loans in 2017, from around 1.5% estimated as of June 2016.”

Saudi banks’ exposure to the building and construction sector increased by 19.7% year-on-year as of June 2016, Moody’s noted.

“This is well above the 8.9% increase in total bank credit over the same period and has contributed to a material increase in the sector’s indebtedness. The NPLs associated to the building and construction sector is already the highest when compared to other sectors, at 3.1% of gross loans as of year-end 2015 (up from 2.8% as of year-end 2015) versus a total reported NPL ratio of 1.2%,” Moody’s said.

Panis said that the construction sector is set to remain the key driver of NPLs in Saudi Arabia.

“The building and construction sector in Saudi Arabia is already the main contributor to NPL formation at Saudi banks over the past five years and we expect this will remain the case in the coming quarters,” he said.

“This is indicated by the increasing proportion of NPLs in this segment, accounting for SAR4.1 billion or 27% of system NPLs as of year-end-2015, up from SAR1.9 billion or 8% of system NPLs as of year-end 2010, and a number of leading indicators of asset-risk trends monitored by Moody’s point to rising pressures that will stem from the construction sector in next 18 months.”

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