Saudi Banks Seek Alternative Funding Strategies to Support Mortgage Demand
In a bid to keep up with the surge in lending, particularly driven by the demand for new mortgages, Saudi banks are expected to explore alternative funding avenues, as projected by S&P Global.
The credit-rating agency’s latest report highlights the shifting funding profiles of financial institutions in the Kingdom, largely influenced by a government initiative to boost home ownership.
Mortgage financing now makes up 23.5 percent of Saudi banks’ total credit allocation, a significant jump from 12.8 percent in 2019, according to the analysis.
With the Vision 2030 economic initiative requiring continuous financing and deposit growth lagging, banks are likely to turn to external sources of funding, as suggested by S&P Global.
This move towards external funding could potentially impact the credit quality of Saudi Arabia’s banking sector, the report predicts.
Lending growth has outpaced deposits among Saudi banks, with the loan-to-deposit ratio surpassing 100 percent in 2022, up from 86 percent in 2019.
S&P Global foresees this trend continuing, especially with corporate lending driving growth in the coming years. The report states, “We consider Saudi banks are likely to turn to alternative funding strategies to fund that expansion.”
Despite the risk posed by maturity mismatch, the stability of Saudi deposits helps mitigate the situation, according to the agency.
Foreign liabilities of Saudi banks are expected to rise, from approximately $19.2 billion in 2023, to meet the funding demands of robust lending growth amidst slower deposit expansion.
The report emphasizes that Saudi banks have already tapped into international capital markets, a trend expected to continue over the next few years.
S&P Global predicts a shift in the Saudi banking system’s position from a net external asset to a net external debt position within a short span of time.
In a separate report from April, S&P Global anticipates strong credit growth of 8 to 9 percent for banks in the Kingdom in 2024, fueled by corporate lending and economic activities under the Vision 2030 program.
Furthermore, the Saudi government and related entities are likely to inject deposits into the banking system, supporting the credit expansion of financial institutions in the Kingdom.