Saudi Arabia’s Banking Sector Outlook Retained as Economic Diversification Programs Drive Growth
Moody’s Investors Service has maintained a positive outlook for Saudi Arabia’s banking sector, citing the Kingdom’s economic diversification programs as a key factor.
In its latest report, the US-based credit rating agency highlighted that the demand for credit for government-backed projects will enhance loan performance and boost profits for banks in Saudi Arabia.
Moody’s stated, “The banks’ operating environment will continue to be bolstered by the strong momentum in the non-oil sector, benefiting from the accelerated implementation of the economic diversification agenda.”
Despite an expected interest rate cycle reversal potentially impacting margins, the report mentioned that loan growth and reduced funding costs could mitigate the effects of lower rates.
However, Moody’s cautioned that the high reliance of the Kingdom’s financial institutions on government deposits and increased market funding due to high credit growth pose risks.
Giga-Projects and Vision 2030 Driving Credit Growth
The ongoing giga-projects in Saudi Arabia supported by the Public Investment Fund are projected to fuel growth in corporate credit, while residential mortgages will continue to drive credit demand on the consumer side.
Additionally, the creation of new sectors such as non-religious tourism and the entertainment industry in the Kingdom is expected to contribute to the positive performance of banks.
Moody’s emphasized, “Faster implementation of Saudi Arabia’s Vision 2030 economic diversification projects is a top priority for government expenditure, with strong growth anticipated to exceed 5 percent in 2024.”
Improving Loan Quality and Profitability
Lending to low-risk government-backed projects is forecasted to enhance asset quality for Saudi banks, with rising exposure to residential mortgages providing additional support.
The credit rating agency projected non-performing loans to remain around 1.5 percent of gross loans, supported by high borrower quality and rapid credit growth.
Moody’s noted that Saudi banks have substantial loss-absorption capacity, with capital ratios among the highest in the Middle East region.
Stable Profitability Expected
Net income for banks in Saudi Arabia is anticipated to stabilize at 1.7 percent of tangible banking assets in 2024, driven by higher rates and loan growth.
While expanding loan books will support profits, margin pressures could arise as the rates cycle changes. Moody’s highlighted the importance of sound cost controls and efficiency for Saudi banks to maintain profitability.
On a positive note, the report mentioned the strengthening capacity of the Saudi government to support banks in times of need.
Moody’s assigned a positive outlook to major banks in Saudi Arabia, including Saudi National Bank, Riyad Bank, Saudi Awwal Bank, Banque Saudi Fransi, Alinma Bank, and Bank AlJazira, while AlRajhi Bank received a stable outlook.
Meanwhile, Moody’s upgraded the outlook of the banking sector in the UAE to positive, citing the growth of the non-oil economy and rising business confidence in the emirates.
The credit rating agency also highlighted the stable outlook for the banking sectors in Bahrain, Kuwait, Oman, and Qatar in the Gulf Cooperation Council region.