Saudi bank assets hit $879bn thanks to mortgages and oil

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• Government initiative drives demand for affordable home ownership
• Rapid mortgage growth can threaten economy if risks not mitigated 

Saudi Arabian bank assets grew by 10 percent to reach SR3.3 trillion in assets ($879.43 billion) in 2021, buoyed by the kingdom’s booming mortgage market and a sharp rebound in oil revenues. 

That’s according to global rankings from The Banker published earlier this month, which also shows that the kingdom’s credit grew by 15.5 percent for the year. 

Saudi National Bank (SNB) and Al Rajhi are the major beneficiaries of the country’s booming mortgage market.

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SNB’s asset base – boosted by the acquisition of Samba Financial Group in April 2021 – grew by 52.5 percent to $243.8 billion, making it the Middle East’s third-largest lender by assets behind Qatar National Bank and First Abu Dhabi Bank (FAB).

Al Rajhi reported a 33 percent increase in assets and a 20.8 percent rise in its Tier 1 capital base during 2021, helping it climb 10 spots in the overall rankings to 103rd position overall.

According to the ‘‘Saudi Arabia Banking Pulse for 2021’ report, published by professional services firm Alvarez & Marsal in May, aggregate loans and advances increased at a higher rate of 14.2 percent year-on-year in 2021, compared to 12.8 percent year-on-year in 2020.

This figure was driven by robust performance in the mortgage segment across the banking sector with aggregate retail mortgages across the Saudi banking sector increasing by 47.8 percent to SAR 413bn.

Government initiatives such as Sakani, which enables Saudi citizens to own their first home, and the Wafi off-plan sales and rent programme have driven the demand for affordable homes and have therefore played a key role in facilitating home ownership for Saudi nationals. 

Until recently, Saudi Arabia had comparatively low home ownership rates – standing at 47 percent in 2016, compared with more than 60 percent across the UK and US. 

In 2016, the Saudi government unveiled a target of 70 percent home ownership by 2030 as part of its Vision 2030 plan. The same plan had targeted 60 percent homeownership by 2020 which, according to the IMF, was surpassed with a figure of 62 percent. 

“This was achieved by a slew of initiatives that have been introduced including mortgage guarantees, a one-stop shop to facilitate home ownership, a higher limit to the maximum loan-to-value ratio for mortgage financing companies, and the recovery of public spending on housing projects,” Ali Metwally, Mena economist and risk analyst at Infospectrum, told AGBI. 

Boosting homeownership is one of the most successful aspects of the Vision 2030 plan, with mortgages having ballooned into a $124bn industry, according to recent Saudi housing ministry figures. 

However, a midyear global banking outlook report published on Thursday by ratings agency S&P entitled ‘Here Comes The Rain Again’ predicts that mortgage growth will slow down in the near future. 

“While Saudi banks have issued well over 600,000 mortgage contracts since 2019 – or about one for every six or seven households in the country – mortgage lending growth stayed strong and retail banks surprisingly continued to revise their 2022 growth guidance upward,” notes Roman Rybalkin, a primary credit analyst based in Dubai for global ratings agency S&P, in the report. 

“Eventually, the increase in interest rates and the higher base will result in lower origination in the next 12-24 months.”

Other industry experts also foresee a slowdown in mortgage lending.

“The Central Bank of Saudi Arabia will likely raise its policy rate further in the second half of 2022 mirroring the Fed hiking cycle which is unlikely to end before Q4 2022 at the earliest,” said Metwally. 

“This will lead to higher interest rates in banks, raising mortgage rates and weighing on mortgage growth well into 2023 – at least until rates begin to decrease again, which is still likely in H2 2023.” 

Relative saturation of the market is also expected to contribute to a slowdown. However, while some industry experts have warned of overexposure of the Saudi banking sector as a result of the rapid growth in mortgage lending, they do not think it currently poses a threat to the banks’ health.

“The share of bank lending that has been directed toward mortgages has increased from 4.7 percent at the end of 2018 to 23.3 percent at the end of Q1 2022,” James Swanston, a Middle East analyst with London-based Capital Economics, told AGBI.

“Therefore, the risk to Saudi banks is that they are now far more exposed to the real estate sector than they were previously. This leaves them exposed to swings in prices and if there were to be an outright fall in real estate prices it could result in some borrowers falling into negative equity. 

Mortgage boom risks

However, Swanston said he does not think that the Saudi mortgage boom presents a “major threat” to the banking system or wider economy.

Rybalkin points to the strong underlying fundamentals of the Saudi mortgage market. 

“Rapid mortgage growth can pose significant risks, however there are a number of important characteristics in the Saudi mortgage portfolio that mitigate some of these risks compared to other countries,” Rybalkin told AGBI. 

“The majority of growth stems from mortgages for first houses, extended as part of a government initiative and almost entirely to government and government related entity employees. 

“These loans are salary-backed and public sector employment – particularly military service – has traditionally been very secure. The average mortgage sizes are relatively small and family support networks in Saudi Arabia are significant. To date the mortgage portfolios have been performing well.”

Rybalkin is optimistic that the Saudi government will hit the 70 percent homeownership target set by Vision 2030, suggesting that it may be hit earlier than planned. 

“Between January 2021 and May 2022, the [Saudi] banks extended 270 thousand new mortgages, or one for every 13-15 households,” noted Rybalkin. “We may see numbers close to 70 percent even this year when GASTAT [Saudi Arabia’s General Authority for Statistics] publishes the new official data.”