Saudi banks are well positioned to endure a more challenging operating environment, due to their strong fundamentals and government support, Fitch Ratings said in a report released Thursday.

Fitch said the funding and liquidity base were the key strengths of the banks to help them face the challenging environment. Asset quality has also been good, with non-performing loans averaging 1.4% of gross loans in 2008 versus 1.8% in 2007.

Fitch said the banking system in Saudi Arabia weakened in the second half of 2008, especially in the fourth quarter due to lower asset valuations. In spite of this, all Saudi banks registered profits in 2008. This was mainly due to banks' strong core revenues offsetting impairment charges and reduction in fair values in their investment portfolio.

Banks benefited from loan growth, although this is expected to ease in 2009, as the economy slows on lower oil revenues. However, Fitch expects Saudi banks to remain profitable in 2009.

Meanwhile, Philip Smith of Fitch's Financial Institutions Team said, Given lower expected business volumes in 2009, Saudi banks will be highly reliant on tapping government-related projects and re-pricing their lending to maintain their good performance. Loan impairment charges, which are expected to increase as the credit cycle worsens, will be one of the main risks in 2009.

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