Saudi lenders gear up for corporate growth

13 March 2024

MEED's April 2024 special report on Saudi Arabia includes:

> GVT & ECONOMY: Saudi Arabia seeks diversification amid regional tensions
> UPSTREAM: Aramco spending drawdown to jolt oil projects
> DOWNSTREAM: Master Gas System spending stimulates Saudi downstream sector

> POWER: Riyadh to sustain power spending
> WATER: Growth inevitable for the Saudi water sector
> CONSTRUCTION: Saudi gigaprojects propel construction sector
> TRANSPORT: Saudi Arabia’s transport sector offers prospects


 

As Saudi Arabia’s once rapacious mortgage market slows down, lenders in the kingdom are building up their corporate loan books. 

Banks’ exposure to the retail market is steadily reducing as the growth of the mortgage market – the big driver of credit growth in recent years – abates. Saudi lenders reported mortgage lending growth of 8% in the first nine months of 2023, compared to 19% in September 2022.

And where once the split between new business booked by Saudi banks was weighted 60:40 on retail and corporate, the split in 2023 was 50:50.

“We have noticed a decrease in Casa (current account and savings accounts). It used to be almost 70% a couple of years ago, but now it is close to 50%, and it means that the cost of funding is growing too,” says Anton Lopatin, senior director, financial institutions at Fitch Ratings.

Changing landscape

One component of this is the moderation of mortgage financing on the back of tightening subsidies and higher interest rates. “In general, the affordability of mortgage financing is less now and we see banks switching their focus to corporate lending. There’s a bit of reshuffling going on and we think that about 60% of the financing growth in 2024 will be from the corporate sector,” says Lopatin.

While Saudi Arabia's Vison 2030 projects have yet make little impact on local banks’ loan books, the expectation is that this will change, and that major economic diversification initiatives will yield good business for Saudi banks.

In the meantime, these lenders must deal with some near-term challenges in 2024, notably higher liquidity – a contrast to the situation in 2022, when financing growth of 14% outpaced deposit growth at 9%, and higher interest rates intensified competition for funding, according to Fitch Ratings. Data from the Saudi Arabian Monetary Agency (Sama) shows that the kingdom’s money supply surged 10% in January 2024 to reach SR2.72tn ($726bn).

That growth was primarily driven by a significant rise in banks’ term and savings accounts, which recorded a rise of 31% to reach SR864.32bn ($230.4bn). These deposits have attracted savings looking for higher yields.

Government reallocation

Another trend has been that government-related entities (GREs) have made moves to increase deposits in the banking system. According to Fitch, liquidity has been supported by increased deposit inflows from GREs, which grew by SAR147bn ($39.2) or 23% in the 12 months to the end of October 2023. Another ratings agency, S&P, noted that the contribution of government and GRE deposits increased to 30% of the total by 2023 from almost 20% in 2020.

According to Fitch, these inflows are mainly term deposits, which are an expensive source of funding for banks. This increase, plus higher competition for funding, has significantly raised the average cost of funding for Saudi banks; it rose to 2.7% in the first nine months of 2023, compared to just 0.4% in 2021. 

“There’s been a change in how the Saudi authorities are managing GRE liquidity,” says Lopatin, who notes that GREs are now choosing to invest their surplus liquidity in higher income-generating deposits with commercial banks, rather than with Sama.

“Since July last year, we’ve seen a significant increase in government-related deposits in the banking sector. And we understand they have adjusted this approach, and now the government entities directly deposit with banks, instead of using the central bank as an additional chain into distribution of liquidity. That is also more efficient.”

Challenging conditions

Banking conditions in Saudi Arabia are looking more challenging in 2024 than in previous years. As Fitch notes, Saudi banks on average saw financing growth slightly above 10% for 2023, and the expectation is that growth will also be about 10% in 2024 – below the expansion of 14% seen in 2022.

Some banks that used to have stronger net margins have reported declines because of the focus on mortgage financing –which is under fixed rates in the kingdom – in conjunction with an increased cost of funding on the back of a declining proportion of Casa accounts. For example, Al Rajhi Banking & Investment Corporation reported that funding costs increased by 74% in year-on-year terms in 2023.

“Al Rajhi’s margins were under pressure last year but are now roughly in line with the sector average of 3.2%,” says Lopatin.

In general, UAE banks reported stronger margins than Saudi banks in 2023, says Lopatin. This is because, in combination with tightening liquidity, Saudi lenders have less ability to manage their margins.

Corporate lending in the kingdom will likely receive a boost from Vision 2030 projects.

“We expect more Vision 2030-related financing to appear on banks’ books this year. It’s still not very material, but most banks want to participate as they see these projects as having a decent balance between risk and reward,” says Lopatin.

Rating agency S&P has said that Saudi banks will need stronger access to international capital to sustain growth and continue financing projects related to Vision 2030. For now, the dependence of Saudi banks on external funding is limited.

Over the long-term, if Saudi banks do build more external debt, that could pose another challenge. International investors now have sustainability at the centre of their investment mandates, and local lenders will also need to look more seriously at their own sustainability metrics.

For example, last year, a panel of UN-appointed human rights specialists was reported to have sent letters to Saudi Aramco and financiers including Citi, Goldman Sachs and BNP Paribas, noting that their financing of the state energy company may be in violation of global human rights rules due to the company’s contribution to climate change. The letter urged the banks to take reasonable steps to prevent or mitigate the impact.

If Saudi banks do become major lenders to Vision 2030 schemes, and therefore need to source funds from outside the kingdom, they too will have to acclimatise to the new global reality – even if that is not a pressing requirement right now.

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James Gavin
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