Saudi banks track more modest growth path

15 September 2023

MEED's October 2023 special report on Saudi Arabia also includes: 

Gigaproject activity enters full swing
Infrastructure projects support Riyadh’s logistics ambitions

Aramco focuses on upstream capacity building
Saudi chemical and downstream projects in motion
Riyadh rides power projects surge
Jeddah developer restarts world’s tallest tower


Surging oil prices may have imbued the kingdom with a renewed sense of economic purpose, but the situation for banks is more complicated.

Economic conditions – notably the higher interest rate climate – have made life more challenging for lenders. They have been acquainting themselves with normality in 2023, after two post-Covid years in which the increase in profit yields averaged 30 per cent.

This year, Saudi bank metrics are solid rather than spectacular. Second-quarter net profits for the country’s 10 listed banks declined by 0.3 per cent in quarter-on-quarter terms to SR17.4bn ($4.64bn), according to figures from Alvarez & Marsal.

Fitch Ratings expects average sector financing growth to slow this year, although remaining above the GCC average of a forecast 5-6 per cent.

According to Junaid Ansari, head of Investment Strategy & Research at Kamco Invest, Saudi Arabia still recorded the strongest growth in outstanding credit facilities during the second quarter of 2023 at 2.5 per cent in quarter-on-quarter terms, while growth in Kuwait, Qatar, Bahrain and Oman was below 1 per cent.

Growth drivers

Aggregate credit facilities in Saudi Arabia grew 5.2 per cent on the start of the year to reach SR2.5tn ($670bn).

“Real estate was the biggest sector in terms of total lending in Saudi Arabia, accounting for 30 per cent of total bank credit facilities and 61 per cent of personal facilities during the second quarter,” says Ansari, citing Saudi central bank data from Bloomberg. 

“Lending growth at Saudi banks is still high, albeit decreasing,” says Anton Lopatin, senior director at Fitch Ratings.

“Fitch is forecasting it to be 12 per cent for the whole year 2023, compared to 14 per cent last year. This is partially because mortgage financing affordability has decreased due to higher interest rates and also state subsidies have been tightened.”

Strong demand for mortgage financing, underpinned by a state subsidy programme, has supported the financing growth of Saudi banks in recent years, says Fitch.

Mortgage financing reached SR567bn ($151bn) at the end of the first quarter of 2023, with a compound average growth rate of 35 per cent over the past five years.

But Fitch sees financing growth moderating in Saudi Arabia.

“In the first six months of this year, deposit growth was above lending growth and that wasn’t the case in 2022,” says Lopatin, who points out that if banks’ funding base is growing faster than financing, that reduces pressure on liquidity.

Liquidity levels

Broadly speaking, liquidity is still healthy in Saudi Arabia. Low-cost current account and savings account (Casa) deposits in Saudi Arabia are still among the highest in the GCC, and there is a strong cash-rich government behind the banks in case of need.

After some liquidity tightening in 2022, the Central Bank (Sama) placed SR50bn ($13.3bn) of deposits in the banking sector to reduce the pressure.

“This is a Saudi-specific issue, reflecting that banks’ financing books are growing faster than deposits, and that is putting pressure on liquidity,” says Lopatin.

Casa deposits remain high in the kingdom, even though rising interest rates have led some customers to shift into term deposits. In the first quarter of 2023, Casa deposits still accounted for 56 per cent of total deposits, whereas two years ago the figure was 65 per cent.

“One reason for this [9 per cent decline] is the higher interest rates, but it’s also because banks have been competing for funding to support their growth. There is a huge increase in the cost of funding, but the margin is still very healthy, and the average net interest margin for the first quarter was 3.2 per cent,” says Lopatin.

Despite the higher cost of borrowing – and the attendant risk that this could force clients to default on loans – this should be manageable for most lenders.

“We believe that with adequate controls and policies, asset quality is not a concern at present for the Saudi banking sector,” says Kamco’s Ansari.

“The cost of risk for the sector has been consistently declining over the last quarters and stood at 44 bps, one of the lowest over the last several quarters. This also remains well below the GCC average of 66 bps.”

Loan health

Another source of comfort for Saudi banks is that the higher interest rates are applied to new loans while older loans remain at pre-decided fixed rates.

As a result, non-performing loans (NPLs) are not expected to see any steep increase in the coming quarters – especially, notes Ansari, in light of expectations of rate cuts from next year.

“In the first quarter of 2023, the average NPL ratio was stable at around 2 per cent, and the cost of risk was about 50 bps, which is rather low,” says Lopatin.

In construction and real estate, this could become an issue if higher interest rates result in higher borrowing costs for these companies.

“Not all of them operate with very healthy margins. Thus, their debt service capability will deteriorate. But as of now, we do not see significant upticks in cost of risk or sector average NPL ratios,” says Lopatin.

If Saudi banks are forced to reduce their exposure to real estate, there should be other opportunities for them to grow loan books – not least the Vision 2030-linked series of gigaprojects looking for support. Some of the Saudi banks whose balance sheets have expanded following mergers are now better placed to fund infrastructure projects.

According to the IMF, while mortgage growth has recently moderated, demand for project-related and consumer loans is expected to remain strong, helping offset the impact on profitability from rising funding costs linked to higher policy rates.

This may take a while to materialise. “As of now, we see only moderate financing for companies participating in the execution of the new gigaprojects in Saudi Arabia, but over the longer term, this will support banks’ lending growth,” says Lopatin.

There are other benefits to supporting these projects, not least with the government being the ultimate guarantor, which is positive from an asset quality perspective. 

With a strengthening oil price expected to underpin a Saudi economic renaissance, there should be many more opportunities for growth-oriented Saudi banks to get their teeth into.
James Gavin
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