It is known that the economic and financial performance of rich exporting –countries such as Saudi Arabia is a function of oil price movements. As banks play a vital role as financial intermediaries between lenders and borrowers of money. In addition, measuring the performance of banks in oil-exporting countries such as Saudi Arabia is vital for many stakeholders, including not limited to the regulatory, shareholders, investors, and the society, as movements in oil prices were among the external and exogenous factors that affect the performance of banks. As Sharp movements in oil prices in oil-exporting countries lead to multiple negative effects, including increases in bad debts, decreases in deposits, deteriorations in the quality of assets, and decreases in the volume of operations [1]. Oil prices witnessed sharp fluctuations in response to geopolitical conflicts and health disasters, as oil prices witnessed sharp declines during the Corona pandemic in 2019-2021, while they witnessed noticeable increases in response to the Russian and Ukrainian war that broke out in February 2022. Increasing oil prices in exporting countries enhances government spending, achieves economic stability, increases bank profits, and Increases stock prices. However, the decline in oil prices affects the quality of loans due to the inability to pay the principal and interest due to the contraction of the private sector’s contracts with the government. In addition, the decline in oil prices result in decreases in credit ratings, increases in cost of capital due to the risk premium, increased default rates and increases in non-performing loans [2]. Economic growth in the Kingdom of Saudi Arabia depends on oil revenues, as oil revenues affect public revenues, Public expenses and bank’s liquidity levels. Oil revenues play a vital role in enhancing economic growth and financial markets. However, In non-exporting oil nations increasing oil prices adversely affects the performance of banks in terms of capital adequacy, liquidity, profits, and operational efficiency, but the negative effects can be absorbed through economic and political stability [3] [4]. [5] Pointed out that the increase in oil prices adversely affects the performance of banks due to the increase in defaults, corporate failures, and the increase in non-accrual loans i.e. non -performing. [6] Explained that an increase in oil prices could affect the economic growth of oil-exporting countries through direct and indirect effects, as loan levels for oil-related and other activities increase, which supports bank profits and in turn supports the state’s public finances. [1] Confirmed that fluctuations in oil prices had a significant impact on non-performing loans.

Research Problem

Previous studies found mixed results as [7] [8] [9] [1]. Found adverse relationships between oil prices and bank performance. While [10] found positive impacts and [11] [12] did not find any impacts. The study contributed to the current literature as it investigated the impact of oil revenues from different perspectives. As it explained the impact of oil prices on both on accounting-based and market- based indicators. It also clarified the way by which oil revenues affect performance of banks and the impact on loan quality and the impacts on GDP. Previous studies used different proxies for oil prices. [13] used the percentage contribution of oil revenues to the gross domestic product [14] used several proxies such as annual percentage change, Annual growth rates of Brent oil prices, Brent Oil prices deviation from 12 months forward rate. [10] Used the Real price of OPEC. [33] Used net decrease in oil prices. [33] Used net decrease in oil prices. [15] Used the international oil prices. [16] Used OPEC basket price.

The current literature showed several studies on the effect of oil prices on the performance of banks, for example [17] [14] [10]. However, little empirical evidence on the effect of oil prices on GDP, which might convey the effect of oil prices to accounting based performance. Current literature provided limited empirical evidence on the impact of oil revenues on the non-performing loans (NPL) as a macroeconomic factor. Previous studies used GDP as macroeconomic factor influencing NPLs such as [18] [19] [20] provided mixed results. Some confirmed positive [21].

The Following Questions Explain the Study’s Problem.

Do oil revenues have a direct impact on the accounting- based performance of Saudi banks?

Do oil revenues have a direct impact on market - based performance of Saudi banks?

Do oil revenues have a direct impact on the quality of loans of Saudi banks?

Do oil revenues have a direct impact on GDP?

Does GDP have a direct impact the accounting- based performance of Saudi Banks?

Literature Review and Hypothesis Development

The answers to the study’s questions contribute to the current literature and fill the gap in the current literature.

Literature Review

[17] Conducted a study on the impact of fluctuations in oil prices on the performance of conventional and Islamic banks in the Gulf Cooperation Council countries for the period 2005-2019. Using fixed-effect regression models, the results indicated that fluctuations in oil prices had a negative and statistically significant impact on the performance of both Islamic and conventional banks, but the impact was greater on Islamic banks. [14] Conducted a study on the impact of fluctuations in oil prices on the performance of banks in the Gulf Cooperation Council countries for the period 2000-2017 using ROA,ROE,Toni’s Q as proxies for banks’ performance. The results indicated that fluctuations in oil prices had a direct impact on the performance of banks under study through increasing oil related lending. However, the negative impact of fluctuations in oil prices was greater than the positive impact, and conventional banks benefited more than Islamic banks, which were vulnerable to the negative effects of oil price fluctuations. [10] Conducted a study on the impact of fluctuations in oil prices on the performance of conventional and Islamic banks in the Gulf Cooperation Council countries. The results indicate that oil prices measured by Real price of OPEC had a positive and statistically significant effect on ROA, ROE and NIM as proxies for profits in the long and short term for both conventional banks and Islamic banks. [1] Conducted a study on the impact of oil prices on the performance of (10) banks in Nigeria. The study used profits after tax, current ratio, and net interest margin as proxies for bank profits and Average annual crude oil price as the independent variable. The study found a negative and statistically significant effect of oil prices on the performance indicators during the period of price declines.

 [11] Conducted a study on the impact of oil prices on the performance of Islamic banks and macroeconomic factors for the period 2007-2016. The study conducted on 48 Islamic banks in seven countries: Saudi Arabia, Iraq, Kuwait, Bahrain, Iran, Qatar, and UAE.The results did not find impacts of oil prices on the performance of Islamic banks due to their low market share compared to conventional banks. The study used ROA, ROE as proxies for bank performance, and oil prices measured as price, t-price t-1/price t-1. The results for Saudi Islamic did not find direct effects of oil prices on ROA, AOE. However, oil prices had direct impacts on GDP, which had impacts on performance indicators. [12] conducted a study on the impact of fluctuations in oil prices on the performance of banks using ROA ,ROE as proxies for profitability in (8) oil producing and exporting countries in the Middle East regions for the period from 2012-2017. The results found direct impacts of fluctuations in oil prices on the financial performance of the countries of Bahrain, Oman, and Iran, while it did not find direct impacts in the countries of Jordan, Kuwait, Qatar, Saudi Arabia, and the Emirates.

[12] Found that negative fluctuations in oil prices had a greater impact on stock returns than the positive effects of oil prices in the countries of Bahrain and Saudi Arabia. [22] Pointed out that the impact of oil prices on stock prices was not symmetrical in the short and long term [23] showed that according to the theory, fluctuations in oil prices would affect stock returns through macroeconomic variables which impact on future cash flow especially share price is a function of the discounted future cash flow.

[24] Conducted a study on the impact of oil price shocks on stock returns during the period 1999-2018. The results indicated that stock returns respond to demand shocks greater than supply shocks, and demand shocks had positive impacts on stock returns in oil-exporting countries and negative impacts in oil-importing countries.[25] [26] pointed out that the reaction of stock markets to the increase in oil prices may be positive or negative. As the reaction of stock markets to fluctuations of oil prices might be positively or negatively, and this depends primarily on the structure of the economy for both oil-exporting countries and oil-importing countries. It also depends on the reasons for the increase, whether it was due to an increase in the real demand or was due to factors related to supply.

 [27] [28] supported the argument by [25] [26] as the reaction depends on the underlying causes of changes. The negative response of stock markets to the increase in oil prices is explained from a microeconomic perspective by the fact that companies that depend on oil as a factor of production will have their profits and distributions affected if they do not pass on these increases to consumers [29]. On the other hand, from a macroeconomic perspective, increasing oil prices affects consumers through an inflation tax. [29]. However, in rich oil-exporting countries, the stock market response positively to the increase in oil prices due to the increase in public spending on mega projects and investments in infrastructure [25].[3] conducted a study on the impact of fluctuations in oil prices on the quality of the loan portfolio. The study used fixed-effect regression dynamic and GMM models for the period 2000-2014 including 2,310 commercial banks operating in( 30 ) oil-exporting countries. The results indicated that movements in oil prices have a significant impact on non-performing loans. [15] Confirmed that declines in oil prices as exogenous variable had a negative impact on non-performing loans. [14] Conducted a study on the impact of fluctuations in oil and gas prices on the non-performing loans of the commercial and Islamic banks in Qatar for the period 2000-2016. The results indicated that fluctuations in oil and gas prices did not directly affect non-performing loans but macroeconomic -specific factors and bank -specific variables transferred the impact oil and gas prices to non-performing loans. [30] Conducted a study on the impact of the fluctuations in oil prices on (18) banks for the period 2009-2020 on non-preforming loans of banks in Kazakhstan. The results found an inverse relationship. i e. negative oil prices reduced the credit quality and vice versa. [16] Confirmed an inverse relationship between increases in oil prices and non-performing loans.

Hypothesis Development

The study developed research hypotheses to reflect the direct impact of the fluctuations in oil revenues without adding any additional explanatory variables either at bank level or at macroeconomic level to avoid the Interaction of oil prices with any additional independent variables. Therefore, based on the literature review the study developed the following hypotheses.

a.Oil revenues have a direct impact on accounting-based performance indicators of Saudi banks.

b .Oil revenues have a direct impact on market -based performance indicator of Saudi banks.

c.Oil revenues have a direct impact on non-performing loans of Saudi banks.

d.Oil revenues have a positive impact on GDP in Saudi Arabia.

e.GDP has a direct impact on accounting- based performance indicators of Saudi banks.

Sample and Data Collection

The study conducted on all (10) banks registered on the Saudi Stock Exchange (TASI) for the period 2013-2022, where the study collected data on return on assets, return on equity, loans, and non-performing loans from the annual financial reports. In addition, the study collected Oil revenue and GDP data from the official sources of the Ministry of Finance of the Kingdom of Saudi Arabia and the study collected share prices from TADAWUL website.

Study Method

The study used time series – cross section panel data with fixed effect regression models and least squared regression models to test the study’s hypotheses and objectives.

Variables Definition and Measurement

Since the study applied only to Saudi banks registered on Saudi Arabia stock market (TASI), the study did not use additional explanatory variables because the study need to investigate the direct impact of oil revenues on accounting -based and market- based indicators as well as the impact on loans quality without any interactions with other control variables.

The results of regression models give the net influence of the fluctuations of oil revenues i e. Average. Therefore, the study will not capture the impact of negative prices on the dependent variables. Therefore, the study used a dummy variable to distinguish between the impacts of years of negative prices and years positive prices separately. The study used the natural logarithm of oil revenues for the basic analysis, and then used percentage increases and decreases in oil revenues to check robustness.

Model Specification

OA it= β0 + β1oil revenues t + Dummy t+ µit (1)

ROA it= β0 + β1oil revenues t+ Dummy t + µit (2)

SP it= β0 + β1oil revenues t + Dummy t + µit (3)

GDP t = β0 + β1oil revenues t+ Dummy t + µit (4)

ROA it= β0 + GDP t + µit (5)

ROE it= β0 + β1 GDP t + µit (6)

SP it= β0 + β1 GDP t + µit (7)

NPLit = β0 + β1NPLit-1+ β2 oil % t+ Dummy t+ µit (8)

Where i = 1, N t = 1… T.

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