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Saudi Central Bank action required to fulfill Vision 2030: S&P

Rapid growth driven by mortgages and government deposits
Saudi Central Bank action required to fulfill Vision 2030: S&P
Saudi banking

The Saudi banking system is facing liquidity constraints despite rapid growth driven by mortgages and government deposits, prompting intervention from the Saudi Central Bank (SAMA) and the need for increased deposit growth.

The system has experienced rapid growth over the past few years, primarily driven by mortgages, considering increasing home ownership to 70% is a Vision 2030 objective. At the same time, however, deposit growth has not kept pace to fund this expansion, leading the system loan-to-deposit ratio (LDR) to exceed 100% at year-end 2022 from about 86.4% at year-end 2019.

Private sector deposit growth has averaged about 5% over the past five years, compared with 14% growth in deposits from the government and its related entities. S&P Global Ratings note that the government still held significant deposits with SAMA of Saudi Riyal (SAR) 637.5 billion at year-end 2022. This means that it can theoretically ease liquidity constraints by placing more deposits with the banking system.

In 2022, SAMA reacted to liquidity stress by intervening and injecting SAR50 billion, and “We expect it to continue providing banking system liquidity when required,” S&P said.

The government has created the infrastructure for banks to divest their mortgage portfolios and improve the structure of their balance sheets. However, banks are yet to sell large volumes of mortgages because a significant portion are low risk. Additionally, with the increase in interest rates, any divestment from fixed rate mortgages could result in some revaluation losses.

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S&P Global Ratings view the Saudi authorities as highly supportive of their banking system and expect that systemically important banks will receive extraordinary support if needed. However, given liquidity constraints and the progressive saturation of the mortgage market, we think that lending growth will slow and shift toward corporates as Vision 2030 contracts are awarded. In the first-quarter 2023, government sector deposit growth has already slowed to an annualized 10% compared with 14% in 2022.

Dr. Mohamed Damak, Senior Director and Head of Islamic Finance, S&P Global Ratings commented: “We expect the Saudi banking system will continue to play a key role in financing Vision 2030 projects, with high-single-digit percentage loan growth in the next couple of years. Banks can achieve this by mobilizing additional resources in the form of deposits or local and international issuances–although in a context of higher-for-longer interest rates–or by divesting some mortgage lending to make space for corporate loans, at the risk of crystallizing some revaluation losses. However, the Saudi banking system alone cannot provide funding to vision 2030. It will require a combination of developing the local capital market and tapping the international capital markets.”

From a risk perspective, it is unclear if lending to Vision 2030 projects will increase the concentration of Saudi banks’ lending books. S&P Global Ratings understand that some projects will be fractionalized to make them easier to finance. Lending book concentration is already a source of risk for Saudi banks and in the wider Gulf Cooperation Council.

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