The Impact of Credit Rate on Profitability: An Applied Study on the Saudi Banking Sector

(Thamer A. Alnoeran and Hmood H. Banikhalid)

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Abstract

The objective of this research is to monitor the impact of credit rating agencies on different institutions, which constitutes one of the important variables in the contemporary business environment and cannot be overlooked. This study aims to examine the impact of credit rating on the profitability of banks. The focus of the study was the Saudi banking sector during the years 2009–2018, where the sample represented all Saudi banks that have a credit rating by Standard & Poor's agency. Standard & Poor's credit rating scores have been adopted as the credit rating representative, which is the independent variable, while the ROA and ROE have been adopted as indicators of profitability and are the dependent variables. The study has attained several findings, the most important being that Saudi banks witnessed a fluctuation in their credit ratings during the study years. This fluctuation in the levels of solvency ranged from the sufficient to the strong ability to pay long-term obligations in local currency. Moreover, the profitability of these banks was characterized by relative fluctuation despite their positive results. However, the econometrics study indicates that there is no statistically significant impact of credit rating on the profitability of banks. This can be explained by the recent conclusion that the decline in credit ratings in most of these banks, from strong to sufficient levels of repayment obligations, did not affect the confidence of customers, and therefore, did not negatively impact revenue.

KEYWORDS
Credit rating agencies, ROA, roe, Saudi banks, solvency, standard & poor’s

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