Fitch Ratings: Fed Rate cuts add pressure on Saudi banks

Fitch Ratings-Dubai/London-19 March 2020: Saudi Arabia's banking sector faces extra pressure on margins as a result of the US Federal Reserve's latest interest rate cuts, Fitch Ratings says. Banks could also see rising funding costs and stressed liquidity if the Saudi government withdraws deposits to fund a widening deficit. The US rate cuts in response to the coronavirus outbreak exceeded market expectations and the Saudi Arabian Monetary Authority (SAMA) followed by cutting its official repo rate by 50bp on 3 March and by a further 75bp on 16 March due to Saudi Arabia's currency peg to the US dollar. The rate is now 1%, its lowest level ever.

We placed all ten Saudi banks' Viability Ratings and four banks' Issuer Default Ratings on Rating Watch Negative earlier in March, reflecting the risk of severe and prolonged deterioration in the operating environment following the rate cuts and sharp fall in oil prices. With little visibility on the authorities' response in terms of government spending, there are uncertainties about the length and impact of a potential shock. (See Fitch Places Saudi Arabian Banks on Rating Watch Negative.) Pressure on margins as well as the impact of lower oil prices will influence how we resolve the Rating Watches.

Link to Infogram: SAMA Repo Rate vs Effective Federal Funds Rates