Investors increasingly worried on Saudi Arabia’s banking system

The oil price has recovered from the bottom; it is up around 90 percent from the bottom seen in February, but price actions suggest that the market is increasingly worried on Saudi Arabia’s banks. In a previous article, we have shown that Saudi Arabia’s banks are dependent on oil price heavily for the inflows and due to the lower oil price, the inflows have dried up and that has been affecting credit exposure in the economy. In the absence of large inflows, the banks have become more vulnerable to non-performing assets in their balance sheet.           

Below are few signs, how investors are worried -

• Since 2015, the stock price of Saudi Arabia’s largest bank, which is often seen as a measure of the wealth of the Royal family, declined by 50 percent. It has shown very high correlation to oil since the summer of 2014, however, as oil price recovered this year the stock have plunged to a new record low.
   
• And as the stock price plunged the cost to protect against a default has gone up sharply.
   
• The cost to protect against Saudi Arabia’s 5-year debt has somewhat stabilized around 150-200 basis points since the oil price recovery but the outstanding net notional has moved well above a billion dollar from just 400 million in early 2015.

Last year Saudi Arabia’s budget deficit was more around 16 percent and the kingdom has gone to the market for the first time in years to raise money via debt. If oil price continues its lower for longer journey, more such issuance are likely.