Saudi Fransi Capital has initiated coverage of the KSA banking sector

Saudi Fransi Capital has initiated coverage of the KSA banking sector with a report titled ‘Marhaba to Rising Rates,’ where it has placed Buy ratings on 3 banks, Samba Financial Group, Saudi British Bank and Arab National Bank.

SFC believes that the banking sector will benefit from higher interest rates that will feed through as the US Fed raises its policy rate to normal levels over the next few years and as local market liquidity tightens. SAIBOR has already begun to inch higher over the last few months. The sector has significant gearing to higher rates, which has grown over the last 8 years, built upon a high proportion of low cost demand deposits. The sector will also benefit from the opportunity to deploy excess liquidity into KSA sovereign bonds, as the government pursues a prudent strategy of diversifying its funding to plug the fiscal gap. 

‘Lower-for-longer’ oil prices will slow deposit and lending growth for the sector, but higher rates will more than compensate for this. Lower oil prices could also raise credit risk for the sector, but SFC believes 1) the government has the muscle to engineer a soft landing for the economy and 2) regulatory supervision and bank balance sheets have been strengthened significantly, thus this risk should be relatively well managed.