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Liquidity strain set to push Saudi banks to seek more funds

An Al Rajhi Bank branch at Medina airport. Al Rajhi and Saudi National Bank are the kingdom's largest lenders by assets Shutterstock/Ahmad Faizal
An Al Rajhi Bank branch at Medina airport. Al Rajhi and Saudi National Bank are the kingdom's largest lenders by assets
  • Loan growth outstripping deposits
  • Annual profits tipped to increase
  • Bonds and sukuk could fill gap

Saudi Arabian banks’ loan books are set to expand faster than their deposits again in 2024, raising costs and pushing lenders to seek additional funding sources.

However, the kingdom’s banks are expected to increase their annual profits this year as government-led infrastructure projects and likely cuts to benchmark interest rates boost margins for its two top lenders, Al Rajhi Bank and Saudi National Bank.

Net customer loans grew 11 percent year on year to SAR2.6 trillion ($693 billion) in 2023, outpacing an 8 percent increase in deposits, according to S&P Global.



As a result, banks’ net loans-to-deposit ratio rose to 102.2 percent in 2023, from 99.7 percent a year earlier. The cost of funds increased to 2.82 percent last year from 0.43 percent in 2021 and 1.1 percent in 2022.

“Bank sector liquidity is tight and that’s feeding into higher funding costs,” said Shabbir Malik, a banking analyst at EFG Hermes in Dubai.

Citi forecasts that loan growth among the six Saudi banks it covers will dip to 10.1 percent this year, versus about 10.5 percent in 2023. Corporate lending will expand 12-13 percent and consumer lending 7-8 percent in 2024, said Rahul Bajaj, director of Mena equity research at Citi in Dubai.

With loan growth again likely to outstrip deposit expansion, banks are seeking alternative funding sources, according to Malik. These may include issuing bonds and sukuk (sharia-compliant bonds) and pooling their mortgage books so they can be offered as securities.

“The lending outlook is quite promising, especially for corporate loan growth, thanks to the projects under Vision 2030,” said Malik.

Credit ratings agency Moody’s is maintaining its positive outlook for the Saudi banking sector, despite pressure on lenders to fund its massive development plans. 

Giga-projects owned by the Public Investment Fund will continue to seek corporate credit, while residential mortgages will drive demand for consumer credit, a Moody’s report said. 

“Faster implementation of Saudi Arabia’s Vision 2030 economic diversification projects is the top priority for government expenditure in 2024,” it added.

Citi’s Bajaj highlighted that state giga-projects have made only limited use of the credit facilities set up to finance them.

“We expect some drawdowns to gradually pick up this year, which will support banks’ earnings,” he said.

Some banks, especially those oriented towards personal lending and mortgages, will probably outperform if interest rates decline as widely forecast, said Malik. This is because retail loans tend to be at fixed rates while funding is increasingly based on variable rates.

Lower interest rates will reduce funding costs as banks cut deposit rates accordingly. That, in turn, will boost their margins. Among those most likely to benefit are Al Rajhi and Saudi National banks.

“Given the macroeconomic backdrop and banks’ relatively strong provision buffers, the credit quality outlook also looks benign,” said Malik.

How Saudi Arabia's banks have performed

Saudi Arabia’s banks earned combined net profits of SAR71.2 billion in 2023, up from SAR63.7 billion in 2022, S&P data shows.

Like UAE banks, rising interest rates – which have surged to two-decade highs from near zero about two years ago – and greater lending boosted Saudi bank profits last year.

But unlike their UAE counterparts, Saudi banks did not make one-off gains from foreign exchange revaluations or asset sales. As such, Saudi earnings growth has lagged behind that of the UAE, said Bajaj.

Citi forecasts the Saudi Banks it covers will achieve a combined net profit increase of 7 percent in 2024, slightly below last year’s 9 percent expansion.

Banks’ net interest margin (NIM) was unchanged at 2.95 percent in 2024, S&P Global found. Their combined NIM was 3.39 percent in 2019 and has declined in the long-term as more customers switched deposits to interest-bearing accounts from interest-free current accounts.

Yet the industry-wide NIM figure masks a differing performance among banks, with some lenders expanding lending margins last year and others reporting a decline, said Malik.

Saudi Arabia’s total banking assets increased 10 percent annually to SAR3.9 trillion in 2023, according to S&P. The UAE’s banking sector assets expanded 11 percent to AED4.1 trillion ($1.1 trillion) over the same period. As such its banking industry is larger than Saudi Arabia’s despite the UAE having roughly one quarter the population.

“Saudi appears to be underpenetrated from a credit perspective versus the UAE,” said Malik. “The UAE is well banked, while the opportunity for longer term growth appears stronger in Saudi Arabia.”

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