Saudi banks set for slower credit growth this year due to tight liquidity

Tight liquidity + lower mortgage lending growth to weigh on banks this year: Saudi banks are forecast to report robust yet slower credit growth of 8-9% this year on the back of tight liquidity and a slowdown in mortgage lending, S&P Global said in its Credit FAQ last week. This is down from 10% credit growth reported by the banks last year, it said.

S&P Global sees growth in mortgage lending slowing down again this year due to high interest rates and market maturity. Mortgage lending growth by banks came in at 8% y-o-y by the end of September, down from 19% in the corresponding period in 2022. It sees corporate lending growth continuing to benefit from planned mega projects under the Vision 2030 and robust economic activity.

Credit growth will continue to back banks’ profitability, with lenders’ return on assets set to stability at 2.2%, according to S&P Global. It sees modest margin compression in the second half of the year if interest rates fall in line with expectations that the US Federal Reserve will start cutting rates. Almost half of most banks’ lending book is made up of corporate loans with variable interest rates.

Gov’t to the rescue: The government is set to continue supporting banks’ credit growth amid tight liquidity through the injection of deposits, according to S&P Global. Deposits by the government and related entities grew to 30% of total by 2023 from c. 20% in 2020. That liquidity boost would help banks maintain liquidity in the near term amid a decline in liquid assets over the past years.

The move away from oil won’t be a massive challenge for banks, but… While banks have limited direct exposure to the energy transition, S&P Global sees a “high” indirect exposure due to the impact of the oil sector’s performance to other sectors, including manufacturing, quarrying and mining, power generation and others. “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,” it said.

Geopolitical tensions could be a challenge: Worsening geopolitical tensions in the region could “negatively impact Saudi banks through deposit outflows,” S&P Global forecasts. However, it sees the lenders’ strong net external positions helping to offset such risks.