Liquidity squeeze deepens for Saudi Arabia’s banks

December 3, 2024, 3:31 PM

Workers on a Riyadh construction site. Saudi Arabia's giga-projects programme has added to banks' liquidity pressures

Loans exceeded deposits in Q3
Based on country’s 10 largest banks
Net interest income rose by 5.6%

Liquidity in Saudi Arabia’s banking sector has tightened again as lending increased more quickly than deposits in the third quarter.

The loan-to-deposit ratio among Saudi Arabia’s 10 largest banks was 100.1 percent in Q3, up from 97.8 percent in the previous three months, according to management consultancy Alvarez & Marsal.

Loans and advances at the 10 banks were 3.7 percent higher in Q3 than in the previous quarter while deposits rose only 1.4 percent, the A&M report reveals.

A loan-to-deposit ratio above 100 percent means banks’ aggregate loans are higher in value than their deposits. This may spur them to issue bonds or borrow on international markets to cover lending. That would increase their funding costs and put pressure on their net interest margins – a key industry metric.

“The Saudi banking sector has experienced liquidity pressures due to rapid credit growth and funding large-scale projects, leading to increased competition for deposits and higher funding costs,” economist Ali Metwally told AGBI last week.

Saudi Arabia’s programme of giga-projects – valued at about $1.25 trillion – is already under funding pressure because of lower-than-expected global oil prices and lacklustre foreign direct investment.

Third-quarter corporate and wholesale lending among Saudi Arabia’s 10 top banks expanded 4.4 percent versus the second quarter, outpacing a 2.7 percent rise in consumer borrowing.

The 10 largest banks accounted for 93 percent of Saudi bank assets as of December 31, 2023, according to AGBI calculations based on S&P Global data.

Their net interest income rose by 5.6 percent in the three months to September 30, the biggest quarterly increase since the third quarter of 2023.

Deposits in non-interest-bearing accounts totalled SAR1.58 trillion ($421 billion) as of September 30, near-flat versus three months earlier.

Time deposits, where account holders receive interest in return for not withdrawing money for a set period, rose 4.1 percent to SAR1.05 trillion. They now represent 38.5 percent of total deposits, up from 37.5 percent on June 30, according to AGBI calculations.

Banks’ cost of funds rose to 3.5 percent in Q3, up from 3.4 percent in the preceding three months and from 3.1 percent in the corresponding quarter of 2023.

Banks’ third-quarter net interest margin was 2.95 percent, up slightly on Q2 but down from 3.06 percent a year earlier. Banks that focus on consumer lending rather than corporate, such as Al Rajhi and Albilad, outperformed in terms of net interest margins, Alvarez & Marsal said.

Banks’ combined third-quarter net profits rose 5.3 percent to SAR20.5 billion, largely thanks to a 15.2 percent jump in non-interest income. Yet impairments surged 30.4 percent in the third quarter, indicating loan defaults are rising.

Quarterly net loan loss provisions rose to SAR2.4 billion from SAR1.8 billion in Q2. However, most banks’ non-performing loan ratio fell thanks to their increased lending.