In its latest report, Fitch Ratings affirmed the resilience of the Saudi and Gulf banking sectors in the face of escalating geopolitical tensions in the Middle East. The agency explained that the current regional conflict, and the subsequent exchange of attacks between Israel and the United States on one side and Iran on the other, are unlikely to have a significant negative impact on the credit ratings of Saudi banks, thanks to the strong financial buffers these institutions possess.
Financial buffers and high liquidity
The agency attributed its stable outlook to the strength of Saudi banks' capital bases and the ample liquidity reserves they have built up over the years. This strength is underpinned by a robust regulatory environment overseen by the Saudi Central Bank (SAMA), which enforces high prudential standards that have historically protected the sector from global and regional economic shocks, from the global financial crisis to oil price volatility.
However, Fitch highlighted a technical point regarding debt markets, noting that the continuation of the conflict may pose some challenges for entities operating in the Gulf countries regarding debt issuance in external capital markets, as a result of the potential high risk premium, but the banking systems in the GCC countries face only very limited immediate credit risks.
Sovereign support: a safety valve
In a related context, the agency emphasized that the credit ratings of Gulf banks are fundamentally based on its expectation of strong sovereign support when needed. The Gulf Cooperation Council (GCC) countries, particularly Saudi Arabia, possess sufficient financial reserves and substantial sovereign assets that enable them to absorb short-term shocks from regional conflicts.
These assets provide effective protection against any potential disruption or short-term fluctuation in oil and gas revenues, enhancing confidence in the ability of governments to support their banking sectors and maintain financial and monetary stability.
Future outlook and non-oil growth
On a broader economic level, the agency noted that geopolitical risks have always been a factor in assessing creditworthiness in the region. Despite the unprecedented scale of current events, the focus is currently on the strength of operating conditions.
This is closely linked to the performance of the non-oil sectors, which are witnessing remarkable growth in the Kingdom in line with Vision 2030. Fitch considers the continued growth of these sectors and the maintenance of investor and public confidence in the region to be crucial factors in supporting the credit ratings of banks, as rated banks have strong financial indicators that give them an edge in facing any risks that may threaten the rating if the conflict is confined to a narrow time frame.
