Saudi Arabia’s banks reported strong profitability metrics in 2023 and the first quarter of 2024, and this trend is expected to largely continue throughout 2024, a new report suggests.
According to a recent Fitch Ratings report, the operating environment for Saudi banks remains favorable, with Fitch’s operating environment score for the sector at ‘bbb+’ – the highest across the GCC banking sectors and globally among emerging market banking sectors scored by Fitch.
This positive operating environment is underpinned by high oil prices and robust government spending, which is supporting the country’s major projects and the Vision 2030 strategy, resulting in solid non-oil GDP growth. Fitch forecasts real non-oil GDP growth to average 4.5 percent over 2024–2025, down slightly from 5 percent in 2022–2023.
Continued strong growth ahead
The agency expects Saudi banks to continue growing at about double the GCC average rate, with financing growth projected at around 12 percent in 2024, up from 11 percent in 2023. However, lenders are likely to increase their focus on corporate financing, which is expected to make up around 60 percent of new originations in 2024, up from about half in 2022-2023.
Read more: Saudi banks post $1.95 billion in aggregate profits for May 2024, reaching 14-month high
Intensifying competition for liquidity
The report also notes that the competition for liquidity has intensified in recent years amid the high financing growth. A notable increase in government-related entities’ deposits at banks in the second half of 2023 (now representing 31 percent of total sector deposits) has supported the banking sector’s liquidity conditions. However, these GRE funds are predominantly in the form of costly term deposits, and the share of current and savings accounts has decreased to 53 percent as of the end of the first five months of 2024. Fitch expects this share to decline further below 50 percent later in 2024-2025.
Furthermore, the report highlights that Saudi banks’ margins have benefited less from higher interest rates compared to some of their peers in neighboring countries.
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