Saudi Banks Adapt to Growing Lending Demand
RIYADH: Saudi banks are gearing up to tackle the surge in lending demand, especially in the mortgage sector, by exploring alternative funding options, as per S&P Global’s latest report.
The credit-rating agency highlighted that the funding landscape of financial institutions in Saudi Arabia is on the brink of transformation, driven largely by a government-backed initiative to promote home ownership.
Mortgage financing now accounts for 23.5 percent of Saudi banks’ total credit allocation, a significant jump from 12.8 percent in 2019, according to the analysis.
S&P Global noted, “The continuous financing requirements of the Vision 2030 economic plan, coupled with moderate deposit growth, are likely to push banks towards seeking alternative funding sources, including external funding.”
Impact on Credit Quality
The report warned that this pursuit of external funding could potentially affect the credit quality of Saudi Arabia’s banking sector.
With lending growth outpacing deposits, the loan-to-deposit ratio crossed the 100 percent mark in 2022, up from 86 percent in 2019, as per the US-based rating agency.
S&P Global predicts that this trend will persist, particularly with corporate lending taking a more prominent role in the growth trajectory.
HIGHLIGHTS
100%
Lending growth among Saudi banks has outpaced deposits, with the loan-to-deposit ratio exceeding 100 percent in 2022, up from 86 percent at the end of 2019.
The agency mentioned, “Despite the risk posed by the maturity mismatch, Saudi deposits provide a certain level of stability.” Additionally, S&P Global forecasted a rise in Saudi banks’ foreign liabilities, from approximately $19.2 billion in 2023 to cater to the escalating lending needs amidst limited deposit growth.
The report emphasized that Saudi banks have already ventured into international capital markets, with the credit rating agency anticipating this trend to persist over the next few years.
According to S&P Global, the Saudi banking system could shift from a net external asset position to a net external debt position in the coming years.
Growth Prospects and Government Support
In April, S&P Global projected robust credit growth of 8 to 9 percent for Saudi banks in 2024, driven by corporate lending and the economic activities spurred by the Vision 2030 program.
Furthermore, the report highlighted expectations of the Saudi government and related entities infusing deposits into the banking system to bolster the credit expansion of financial institutions in the Kingdom.