Saudi Banking Sector’s Outlook to Be Stable in 2025

On the back of strong corporate lending, mortgage demand and funding needs for diversification paths and low interest rates, the outlook for Saudi Arabia’s banking sector is expected to be stable year this year, according to S&P Global’s Saudi Arabia Banking Sector Outlook 2025.

The report said that the domestic banks were likely to see stable earnings this year, as higher volumes made up for narrower interest rate margins. Return on assets (ROA) is estimated at 2.1%-2.2% for the year, while net interest margins are expected to narrow by 20-30 bps due to Saudi Central Bank’s (SAMA) Fed-aligned rate cuts. Strong credit growth is expected to offset this decline, the report said.

Floating-rate corporate loans (50% of total loans) are expected to reprice quickly and rake in lower interest rate income, while fixed-rate long-term mortgages (25% of loans) will provide income stability. While lower interest rates will also decrease funding costs, further drops in rates may lead consumers to demand deposits, affecting bank funding portfolios.

The Saudi banking sector reported a 19.2% capital adequacy ratio as on 30 September 2024, well above the minimum capital adequacy requirement of 10.5%. Dividend pay-out ratios were expected to average 50%, supported by strong earnings.

The corporate lending will underpin a forecasted 10% credit growth, as companies look to bankroll diversification projects. Meanwhile, lower interest rates are expected to boost mortgage lending, while expanding mortgage portfolios will also be supported by growing demographics and a rising demand for residential real estate.

Non-performing loans are expected to inch up to 1.7% of total loans this year, up from 1.3% in September 2024, due to limited loan write-offs. The accumulation of NPLs is expected to remain slow due to low interest rates. Credit losses are expected to be capped at 50-60 bps through the coming two years due to strong loan provisions.

Even private sector leveraging is set to increase due to lower interest rates, but will remain below 150% of GDP in the medium term, the report said.

Liquidity Pressures

The report also said that lending growth outpaced that of deposits, pushing banks to look for alternative funding sources. In the second half of 2024, the banking system shifted to a net external debt position, close to 1% of total loans.

“We expect the external debt build-up to continue in the next couple of years and expect SAMA would intervene if liquidity tightens.

Alternative Funding

Saudi banks’ reliance on external funding will continue due to Vision 2030 investment needs, though recent mortgage-backed securities initiatives may help.

Saudi Real Estate Refinance Company (SRC) and Hassana’s initiatives to issue residential mortgage-backed securities, and SRC’s agreement with Blackrock, could help attract local and foreign capital and unlock liquidity to support Vision 2030.

The Saudi banking sector has seen mergers create dominant ‘national champions’. Although this has resulted in concentration of market share and raised competitive pressure on smaller institutions, overall industry dynamics in terms of broader financial stability remain sound, the report added.