Saudi banks’ funding profile changing on rising mortgage demand: S&P Global

Saudi banks are expected to pursue alternative funding strategies to deal with the rapid expansion in lending, fueled by the demand for new mortgages, according to S&P Global.

In its latest report, the credit-rating agency stated that the funding profiles of financial institutions in the Kingdom are set to undergo changes, primarily driven by a state-backed initiative to boost home ownership.

According to the analysis, mortgage financing represented 23.5 percent of Saudi banks’ total credit allocation at the end of 2023, compared to 12.8 percent in 2019.

“The ongoing financing needs of the Vision 2030 economic initiative and relatively sluggish deposits growth, is likely to incentivize banks to seek alternative sources of funding, including external funding,” said S&P Global.

The report also predicted that this pursuit of external funding could potentially impact the credit quality of Saudi Arabia’s banking sector.

According to the US-based rating agency, lending growth among Saudi banks has outpaced deposits, with the loan-to-deposit ratio exceeding 100 percent in 2022, up from 86 percent at the end of 2019.

S&P Global expects this trend to persist, particularly with corporate lending playing a more significant role in growth over the next few years. “We consider Saudi banks are likely to turn to alternative funding strategies to fund that expansion,” the report said.

It added: “We consider, however, that the risk created by the maturity mismatch is mitigated by the relative stability of Saudi deposits.”

The agency also predicted that Saudi banks’ foreign liabilities will continue to increase, rising from about $19.2 billion at the end of 2023 to meet the funding requirements of strong lending growth, particularly amidst lower deposit expansion.

The report highlighted that Saudi banks have already tapped international capital markets, and the credit rating agency expects this trend to continue for the next three to five years.

According to S&P Global, the Saudi banking system could transition from a net external asset position of SR42.9 billion, or 1.6 percent of lending, at the end of 2023 to a net external debt position within a few years.

In April, S&P Global, in another report, stated that banks in the Kingdom are anticipated to experience robust credit growth ranging between 8 to 9 percent in 2024.

The agency noted that this credit expansion will be propelled by corporate lending, fueled by increased economic activities driven by the Vision 2030 program.

Moreover, the report added that the Saudi government and its related entities are expected to inject deposits into the banking system, thereby supporting the credit growth of financial institutions in the Kingdom.