Saudi banks meet Basel III requirements

Saudi banks maintain a comfortable position, adequately fulfilling even the enhanced capital requirements that have been put forward by Basel Committee, Global Investment Research has said in a new report.

The oversight body of the Basel Committee on Banking Supervision in its meeting on September 12, 2010 announced the strengthening of existing capital requirements. The package will increase core Tier 1 capital ratio of 2 per cent (under Basel II) to 4.5 per cent (under Basel III) till January 1,

2015, and will also be supplemented by an additional capital conservation buffer of 2.5 per cent till January 1, 2019.

This enhances the total common equity requirements from 2 to 7 per cent by 2019. The minimum Tier 1 capital ratio will also rise from 4 to 6 per cent, whereas the difference between the total capital requirement of 8 per cent and the Tier 1 requirement can be met by Tier 2 capital.

Such capital reforms are believed to enhance the banks' capability to better endure the periods of economic and financial stress, leading to improved long term financial stability and growth.

The Global report says that the Saudi banks' Tier 1 capital ratio (above 10 per cent) during 2009 & H1 2010 remains well above the minimum requirement of 4 per cent under Basel II and 6 per cent under Basel III. "While the banks globally took up the challenges of coping with various financial issues

(including recapitalising of balances sheets), the Saudi banks largely confident of their strong fundamentals do not fear from any severe financial system issues," the report states.

"Even in 2008, which saw the eruption of severe financial fears, the Saudi banks kept their head high with Tier 1 capital ratio above 8 per cent adequately meeting the requirements," it adds.

The Global report quotes recent comments by IMF as encouraging. "The [Saudi] central bank's operations were directed toward shoring up confidence in the Saudi banking system and stimulating credit growth. The banking system continued to show resilience by weathering the crisis."

Global analysts believe that driven by the Kingdom's economic growth potential, low credit penetration level, and domestic demand fundamentals, the Saudi banking system holds significant long-term growth potential.

The research firm estimates Saudi banks to experience modest asset and loan growth of 4 and 6 per cent, respectively, in 2010 that could reach double digit in 2011.
 

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