Deposits from government-related entities help Saudi banks reduce liquidity pressure: Fitch

Increased inflows from government-related entities helped banks in Saudi Arabia reduce liquidity pressure in 2023, according to Fitch Ratings.

In its latest report, the credit rating agency noted that deposits from GREs surged by 23 percent in the 12 months to the end of October 2023 to SR147 billion ($39.20 billion).

Fitch added that funds from the entities constituted 70 percent of the total deposit inflows during the same period.

The report, however, added that GRE deposits with the Saudi Central Bank, also known as SAMA, fell by SR184 billion in the first 10 months of 2023.

The liquidity of banks in Saudi Arabia came under pressure in 2022 as a 14 percent financing growth outpaced deposit increases of 9 percent and higher interest rates intensified competition for funding.

The report noted that eased during the first 10 months of 2023, as sector loans and deposits grew in line by 9 percent each.

Moreover, during the same period, the average regulatory loans-to-deposits ratio decreased by about 200 base points to 79.7 percent.

“The lower (LDR) ratio was largely due to calculation adjustments, including increased weights for long-term debt in the denomination,” Fitch said in its report.

The US-based agency further noted that GRE bank deposits could gradually be moved to the private sector, as it has been proven beneficial for both the companies and the financial institutions.

“We expect GRE bank deposits to gradually transit to the private sector, largely through contractual payments to private sector corporates and salary payments to individuals. We do not expect GREs to move significant deposits back from banks to SAMA as the new approach of liquidity management appears to be more efficient both for GREs and for banks,” added Fitch.

In November 2023, the credit rating agency had said that Saudi banks would continue to diversify their funding bases by borrowing money from financial markets, including issuing sukuk and bonds.

Last month, Fitch had also retained a neutral outlook for Islamic banks in the Gulf Cooperation Council region for 2024, primarily driven by higher oil prices and profit rates.

In its report, the credit rating agency added that Islamic banks in the region are expected to witness sound profitability in 2024, while capital buffers should remain adequate for the risks.