This report does not constitute a rating action.
High interest rates and tight liquidity conditions have weighed on credit growth in Saudi Arabia's banking sector, although it remained robust at 10% in 2023. Also, after strong growth over the past few years, new mortgage lending has slowed somewhat. At the same time, deposits have been lagging lending growth.
Here, S&P Global Ratings answers frequently asked questions from investors regarding how we expect Saudi Arabia's banks will perform in 2024.
Frequently Asked Questions
What will be the main factor for credit growth in 2024?
Saudi banks will likely report strong-but-slower credit growth of 8%-9% in 2024 due to lower mortgage lending growth and tight liquidity. This compares with 10% credit growth reported on Dec. 31, 2023, which was in line with our expectations. Corporate lending growth will benefit from Vision 2030 projects and the ensuing stronger economic activity. We expect mortgage lending growth to slow further in 2024 due to high rates and market maturity. Banks reported year-to-date mortgage lending growth of 8% over Sept. 30, 2023, compared with 19% in September 2022.
How will tight liquidity conditions affect banks' ability to finance Vision 2030 projects?
We expect the Saudi government and its related entities will continue to inject deposits into the banking system to support the banks' credit growth. The contribution of government and government-related entities' deposits increased to 30% of the total by 2023 from almost 20% in 2020. At the same time, we could see higher recourse to external funding. While Saudi banks remain in a net external asset position, this declined over the past couple of years, a trend we think will continue. A rapid buildup of external debt could increase Saudi banks' vulnerability to global liquidity conditions, in our view. However, given the sheer size and long-term nature of investments under Vision 2030, we believe that the banking sector alone will not be able to meet funding needs, and that substantial part of the financing will come from the local and international capital markets.
Domestic liquidity conditions normalized toward the end of 2023. The banks' loans to deposits reached close to 100% in 2023, compared with 86% in 2019.
Why did interest rate increases not translate into a sharp increase in NPLs and how do you think asset quality will evolve this year?
Despite high interest rate over the past two years, asset quality indicators were broadly stable. High exposure to mortgages, primarily for government or its related entities employees, and systematic write-offs of impaired retail exposures supported the banks' NPL ratios in 2023. Nevertheless, we expect high interest rates to start weighing on corporate creditworthiness in 2024. Based on a sample of 150 companies across sectors, leverage increased slightly in September 2023 but remained manageable on average. At the same time, stage 2 loans marginally increased to 5.4% of total loans in September 2023 versus 5.2% in 2022.
What will propel earnings growth?
We expect credit growth to support banks' profitability. The banks' RoA is likely to stabilize at 2.2%, similar to our estimate for 2023. Toward the second half of 2024, we expect slight margin compression from lower interest rates. Almost half of Saudi banks' lending book is corporate loans with floating rates, while almost 50% of the banks' funding was non-interest-bearing as of December 2023. Corporate loans will reprice downwards leading to some pressure on the banks' net interest margins. However, as interest rates increased fast over the past 18 months, we expect to see some impact on corporate creditworthiness, leading to higher NPLs. However, we expect the impact to be marginal because Saudi corporates have relatively manageable leverage.
What are the implications of strong credit growth on banks' capital position?
Saudi banks are well-capitalized. They reported a capital adequacy ratio of 19.5% at Sept. 30, 2023. We expect rated banks' capitalization to remain a positive rating factor. Banks are profitable and their earnings generation are sufficient to cater for asset growth. We expect their dividend payout ratio to hover at an average of 50%.
How exposed are Saudi banks to energy transition risk?
For banks in Saudi Arabia, direct exposure to the energy transition is limited. To estimate risk for banks, we use their exposures to sectors including manufacturing, oil and gas, quarrying and mining, power generation, and 30%-40% of banks' government lending. At year-end 2022, banks' total exposure to these sectors reached 11% of total lending. Nevertheless, indirect exposure is high, in our view. That's because other sectors tend to correlate with the oil sector's performance, either directly through the supply chain or indirectly through government and consumer spending.
More broadly, a growing number of investors are incorporating sustainability into their investment mandates. For now, the dependence of Saudi banks on external funding is limited, as shown by their net external asset positions. However, they will need stronger access to international capital to sustain growth and continue financing projects related to Vision 2030. We expect the buildup of external debt to be gradual. We also expect Saudi banks to put higher emphasis on sustainability in their strategies to remain on investors' radars.
Where do you see your Saudi bank ratings heading in 2024?
Our ratings on Saudi banks all carry stable outlooks with the exception of Saudi Investment Bank. We also see stable trends for economic and industry risk under our Banking Industry Country Risk Assessment for Saudi Arabia. A key risk that may affect these trends is an unexpected escalation of geopolitical risk. Another risk area is the potential volatility of oil prices if global economic prospects prove bleaker than we currently project.
Related Research
- GCC Banking Sector Outlook 2024: A Relative Bright Spot Among Emerging Markets, Jan. 31, 2024
- Banking Industry Country Risk Assessment: Saudi Arabia, Sept. 22, 2023
- Banks In Major GCC Economies Remain Resilient To Less Supportive Operating Conditions, Sept. 12, 2023
| Primary Credit Analyst: | Zeina Nasreddine, Dubai + 971 4 372 7150; zeina.nasreddine@spglobal.com |
| Secondary Contacts: | Mohamed Damak, Dubai + 97143727153; mohamed.damak@spglobal.com |
| Roman Rybalkin, CFA, Dubai +971 (0) 50 106 1739; roman.rybalkin@spglobal.com |
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