While Saudi Arabia’s banks will remain robust this year, their credit growth could decelerate to 8 to 9 percent. This is according to a new report from S&P Global Ratings. Lower mortgage lending growth and tight liquidity are the major reasons. In 2023, Saudi banks posted a 10 percent growth rate.
Additionally, the firm maintains stable outlooks for ratings on Saudi banks, except for Saudi Investment Bank. It also anticipates stable economic and industry risk trends, citing the Banking Industry Country Risk Assessment for Saudi Arabia. However, there are potential risks, including unexpected escalations in geopolitical tensions and volatility in oil prices.
Financing Saudi Vision 2023 projects
In the S&P document, the financial intelligence solutions provider stated, “Corporate lending growth will benefit from Vision 2030 projects and the ensuing stronger economic activity. We expect mortgage lending growth to slow further in 2024 due to high rates and market maturity.”
Commenting on how tight liquidity conditions could affect Saudi banks’ capacity to finance Vision 2030 projects, S&P predicts that the Saudi government and related entities will continue injecting deposits into the banking system to bolster credit growth.
In 2023, the percentage of government and government-related entities’ deposits surged to 30 percent. This is a nearly 20 percent jump from 2020.
However, they also foresee a potential uptick in reliance on external funding.
“While Saudi banks remain in a net external asset position, this declined over the past couple of years, a trend we think will continue. A rapid buildup of external debt could increase Saudi banks’ vulnerability to global liquidity conditions, in our view,” stated S&P.
“However, given the sheer size and long-term nature of investments under Vision 2030, we believe that the banking sector alone will not be able to meet funding needs and that a substantial part of the financing will come from the local and international capital markets,” it added.
Stable NPL ratios
Despite the significant increase in interest rates over the past two years, there hasn’t been a sharp rise in Non-Performing Loans (NPLs). According to S&P analysts, “High exposure to mortgages, primarily for government or its related entities employees, and systematic write-offs of impaired retail exposures supported the banks’ NPL ratios in 2023.”
Looking ahead to 2024, analysts anticipate that the impact of high interest rates may start to manifest in the corporate sector. Despite manageable leverage levels among a sample of 150 companies across various sectors as of September 2023, there was a slight increase in leverage during that period. Additionally, the proportion of Stage 2 loans, which represent loans that have shown signs of credit deterioration but have not yet reached the level of being classified as NPLs, marginally increased in September 2023 compared to the previous year.
Saudi bank’s profitability
For S&P, the strong but slower credit growth can enhance Saudi banks’ profitability in 2024. Additionally, they predict that the Return on Assets (RoA) for banks will stabilize at 2.2 percent, mirroring the estimate they had for the previous year. However, in the latter part of 2024, a slight margin compression is expected due to decreasing interest rates.
“Almost half of Saudi banks’ lending books are corporate loans with floating rates, while almost 50% of the banks’ funding was non-interest-bearing as of December 2023. Corporate loans will reprice downwards, leading to some pressure on the banks’ net interest margins,” the firm explained.
S&P added, “However, as interest rates increased fast over the past 18 months, we expect to see some impact on corporate creditworthiness, leading to higher NPLs. However, we expect the impact to be marginal because Saudi corporates have relatively manageable leverage.”
Regarding credit growth, S&P also noted that it will positively impact the banking landscape’s capital position. This is evidenced by the banks’ well-capitalized status, with a reported capital adequacy ratio of 19.5 percent as of September 30, 2023.
On energy transition
While Saudi Arabia undergoes a substantial energy transition, S&P emphasized that the direct exposure of Saudi banks to the energy transition is limited, comprising only 11 percent of total lending by the end of 2022.
Nonetheless, indirect exposure is still significant, as other sectors closely correlate with the performance of the oil sector.
“More broadly, a growing number of investors are incorporating sustainability into their investment mandates. For now, the dependence of Saudi banks on external funding is limited, as shown by their net external asset positions. However, they will need stronger access to international capital to sustain growth and continue financing projects related to Vision 2030,” said S&P.
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