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Saudi bank profits to ride out home liquidity squeeze

saudi bank profits Reuters/Fahad Shaeed
Saudi banks have taken steps to unlock foreign capital and alternative funding because of high borrowing demand
  • Saudi debt to rise by 10%
  • Big recent borrowing increase
  • Banks turn to overseas sources

Saudi banks are “poised for stable profitability” in 2025 despite their continued dependence on international capital markets, say analysts.

External debt is likely to build up in the coming years because of high borrowing demand in the kingdom, which the ratings agency S&P Global expects to increase by 10 percent this year, driven by corporate lending and the implementation of Vision 2030 megaprojects.

Growth in the market will make up for banks’ use of foreign capital, as the volume effect compensates for lower margins, the agency wrote in its Saudi Arabia Banking Sector Outlook 2025. It predicted banks’ return on assets will stabilise at 2.1 to 2.2 percent.

A liquidity squeeze in the Saudi banking sector meant its net foreign assets dropped into negative territory in the second half of 2024, falling to -SAR49.484 billion (-$13.19 billion) in November, the most recent month for which the Saudi central bank has published statistics.

The cashflow shortage has encouraged banks to take a series of steps to unlock foreign capital and alternative funding, including the launch of residential mortgage-backed securities earlier this year.

There has been a massive borrowing increase in Saudi Arabia over the past decade. The past year alone has seen private sector domestic borrowing increase as a percentage of GDP from 61 percent to 69 percent.

S&P expects this trend to continue to continue because of increased demand for finance in the construction and services sectors catering for Vision 2030 projects.

The agency also predicted average GDP growth will increase to 4 percent in 2025-27, a rise on the World Bank’s 4.6 percent forecast for 2025-26 and the International Monetary Fund’s 3.7 percent.

The contribution of the non-oil sector to growth is expected to increase, with the tourism sector showing particular potential, accounting for about 4 percent of GDP in 2023.