Saudi banks’ external debt remains predominantly focused on interbank deposits and repurchase agreements, indicating that they can effectively manage their external debt spike, a new report revealed.Â
According to credit rating agency S&P Global, the rise in interbank liabilities was the primary driver of growth in Saudi banks’ external debt, contributing to 55 percent of the overall increase in external gross debt in 2024. The remainder primarily came from issuances in international capital markets, either directly or through global branches of Saudi banks.
In 2024, foreign banks represented about 59 percent of Saudi banks’ external debt. This reliance poses potential risks, as these funding sources are generally shorter-term and more volatile than capital market issuances. The ratio of Saudi banks’ due from banks and branches abroad to the due to foreign banks declined to approximately 54 percent by the end of 2024, down from 109 percent at the end of 2022. This decline could expose banks to sudden outflows influenced by foreign investor behavior. Nevertheless, almost half of the deposits come from the Gulf Cooperation Council (GCC) region, where liquidity is more stable.
Supportive Saudi authorities boost banking system stability
Saudi authorities are seen as highly supportive of the banking system, and extraordinary assistance is expected if necessary. GCC governments, including Saudi Arabia, have a strong track record of providing support during critical times.
The total gross external debt of the Saudi banking system reached $109.5 billion at the end of 2024, nearly quadrupling from $29.5 billion in 2018.
To create financing headroom for Vision 2030, Saudi banks are shifting some assets off their balance sheets, particularly mortgages, the paper explained. They are divesting mortgages directly to the Saudi Real Estate Refinance Company, which reported SAR28.8 billion in total mortgage purchases as of the end of 2024, or considering securitization to remove them from their balance sheets. This option remains nascent and depends on investor comfort with the risks involved in securitization.
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Understanding banks’ reluctance to aggressively divest mortgages
The agency outlined several factors explaining why banks have not pursued more aggressive divestment of mortgages, despite their significant mortgage portfolios valued at approximately $180 billion, or 23 percent of total loans, by the end of 2024:
- Mortgages provide good risk-adjusted profitability, being fixed-rate and often backed by real estate collateral.
- Higher interest rates previously rendered some fixed-rate mortgages unprofitable for divestment, but recent lower rates have improved this situation.
- Some investors are wary of risks associated with residential mortgage-backed securities (RMBS) and the banks’ capacity to access collateral.
The report further expected a Saudi market for RMBS to develop gradually over the coming years. Simultaneously, external debt will continue to grow to meet short-term demand as banks maintain the capacity to absorb associated risks.
