Despite a significant increase in external funding over the past three years, the overall contribution of net foreign debt to Saudi banks' funding remains limited. Banks have resorted to external funding as local sources proved insufficient to support domestic borrowing demand. In 2024, for example, banks extended SAR 371.8 billion ($100 billion) of new loans, while their deposits grew by only SAR 218.9 billion, leaving SAR 152.9 billion to be refinanced. S&P Global Ratings expects this trend to continue over the next three to five years, but we don't expect external debt to translate into significant vulnerabilities for Saudi banks.

External debt will help Saudi banks to continue growing and cater for Vision 2030.  Saudi banks have grown rapidly over the past few years, propelled by demand for mortgages (at least until 2022), with the growth supported by abundant local funding. More recently, banks have increasingly tapped international capital markets for funding as local sources proved insufficient to meet the country's ambitious requirements, as set out in the state's Saudi Vision 2030 development program, and the expected growth in corporate financing requirements. By the end of 2024, banks had shifted from their earlier net external-asset position to a small net external-debt position of SAR 34 billion. We expect foreign liabilities to almost double in the next three years (see chart 1). While the absolute number may appear significant, we expect Saudi banks net external debt position to remain at a manageable level of about 4.1% of total lending by the end of 2028.

Chart 1

Saudi banks' external debt remains skewed toward interbank deposits and repurchase agreement lines.  The increase in interbank liabilities was the main contributor to the growth of Saudi banks' external debt, accounting for 55% of the overall increase in the external gross debt in 2024. The remainder was primarily issuance in international capital markets, either directly or through Saudi banks' branches operating in global liquidity centers.

In terms of stock, due to foreign banks accounted for about 59% of Saudi banks' external debt in 2024. We view that as a potential source of risk because such funding sources tend to be generally shorter-term and potentially more volatile than capital market issuance. The percentage of Saudi banks' due from banks and branches abroad divided by the due to foreign banks declined to about 54% by the end of 2024, from 109% at the end of 2022, potentially exposing banks to sudden and significant outflows governed by foreign investors' appetites. However, such a scenario is not part of our base case. That is partly because we understand that almost half of the deposits come from within the Gulf Cooperation Council (GCC) region, where some banking systems are awash with liquidity, and therefore likely to be stickier. We also understand that some of the due to foreign banks are repurchase agreement (repo) transactions.

Finally, we view Saudi authorities as highly supportive of the banking system and expect extraordinary support will be forthcoming should the need arise. GCC governments, in general, and Saudi Arabia, in particular, have a strong track record of providing such support when needed.

Not Walking In Qatar's Footsteps

Investors looking at Saudi Arabia's rapid increase in external debt often make the comparison with Qatar's experience with external debt funding. In Qatar's case, significant domestic infrastructure investments (including in preparation for the 2022 FIFA World Cup) resulted in an external debt imbalance underpinned by a desire to secure low-cost funding. Qatar's net banking system external debt to systemwide domestic loans peaked at 40.6% at the end of 2021, up from 5.3% at the end of 2014.

While that ratio fell to 33% by the end of 2024, after the Qatar Central Bank imposed more stringent regulatory requirements, we consider the banking system's high level of external debt could pose a risk in the event of significant capital outflows due to geopolitical events. The potential for that eventuality was demonstrated in 2017 when Qatar was boycotted by a group of Arab states, resulting in outflows of over $20 billion that were offset by a more than $40 billion injection by the Qatari government and related entities.

Some investors see parallels between Qatar's recent history and Saudi Arabia's financing needs, which are largely emanating from Vision 2030. We are monitoring the potential for risks to emerge, although at this stage, and based on our expectations, the likelihood of an adverse outcome appears low in Saudi Arabia.

We do not completely dismiss the risk, though we believe context is important to understanding the potential for pressures to emerge. The total gross external debt of the Saudi banking system was $109.5 billion at the end of 2024, which is almost quadruple its $29.5 billion at the end of 2018. In comparison, the highest amount of gross external debt mobilized by the Qatari banking system was $196.9 billion, at year-end 2021. Further perspective on those numbers is provided by comparing the sizes of the countries' banking systems, with the total assets of Saudi banks almost twice those of their Qatari counterparts (see chart 2).

Chart 2

A Role For Mortgage-Backed Securities?

In addition to increasing their external debt, Saudi banks are seeking to create financing headroom (particularly to meet the demands of Vision 2030) by shifting some assets off their balance sheets. The low-hanging fruit in that process is mortgages. Banks are either divesting mortgages directly to the Saudi Real Estate Refinance Company (A/Stable/--), which reported SAR28.8 billion of total mortgage purchases as of the end of 2024; or 1% of the banks' total lending book, or they are contemplating the use of securitization to move them off their balance sheets. The latter option remains nascent and appears dependent on local and foreign investors becoming more comfortable with securitization's risks, and specifically creditors' capacity to claim against the real estate assets in the event of default.

It is legitimate to wonder why banks have not been divesting mortgages more aggressively, particularly given huge mortgage books, worth about $180 billion, or 23% of all loans, as of the end of 2024. We see three main reasons for this:

• The mortgages provide good risk-adjusted profitability; mortgages are fixed-rate, primarily provided to civil servants or employees of large Saudi companies, typically repaid via salary assignment, and supported by real estate collateral. Why would banks divest them if they can refinance them at a lower cost.
• Higher interest rates had, until recently, meant some fixed-rate mortgages were out of the money, meaning that a bank moving them off its balance sheet would have to book a loss. Recent lower interest rates have reversed that situation, in some instances.
• Some investors are uncomfortable with the risks inherent to residential mortgage backed securities (RMBS) and/or banks' capacity to access collateral, which is investors' ultimate recourse to recover funds in the event of an RMBS default. Greater clarity regarding legal processes or flooring the risk at a certain level could reassure investors and facilitate the development of the market.

It is therefore our expectation that a Saudi market for RMBS will emerge, albeit slowly in the coming years. At the same time, external debt will continue to grow, both to meet short-term demand and because banks continue to have headroom to absorb the associated risks.

Related Research

• Saudi Arabia Banking Sector Outlook 2025: Vision 2030 Momentum Continues, Jan. 20, 2025
• Banking Industry Country Risk Assessment: Saudi Arabia, Dec. 6, 2024
• Your Three Minutes In Saudi Vision 2030: Credit Implications For Banks And Corporates, May 2, 2024