The prospects for Saudi Arabia’s banking sector remain bright in 2024, even as the stellar growth levels of the early years of the country’s Vision 2030 social and economic development programme have moderated.
Credit growth for lenders in the Middle East’s largest economy slipped in 2023, but may still record a double-digit increase for the year ahead, buoyed by strong underlying growth in the country’s non-oil sector.
“The Saudi banking sector has been expanding at a faster rate than other GCC markets since the pandemic on the back of strong non-oil GDP growth, even as banks’ growth has moderated from the second half of 2022,” says Anton Lopatin, a senior director at Fitch Ratings in Dubai.
“While credit growth slowed in 2023, it still remains comfortably ahead of that of the UAE and the rest of the GCC.”
Financing growth — forecast to reach around 10 per cent for 2024 by Fitch — is set to continue into 2024 on the back of sustained demand for corporate and wholesale credit, compensating for a cooling off of the country’s once all-conquering retail mortgage market. Moreover, 2024 may mark the year when direct lending opportunities to the country’s gigaprojects — long coveted by banks — finally start to become realised.
If 2022 marked an annus mirabilis for Saudi banks and the wider economy — characterised by high oil revenues, a burgeoning non-oil economy, low interest rates and a booming mortgage market — 2023 inevitably marked something of a comedown for lenders.
The country went from being the best performer of the G20 to recording a 0.8 per cent economic contraction in 2023, with a buoyant non-oil economy outweighed by a 9 per cent shrinkage of the oil economy, thanks to ongoing production cuts aimed at shoring up prices in the face of rising US production.
And with interest rates rising in line with the US Federal Reserve (due to the Saudi riyal’s long-standing peg to the dollar) despite inflation remaining at below 3.5 per cent for the past two years, bank lending saw a sharp drop compared with the previous year.
“In that context, what we saw in 2023 was continued growth in the banking sector, albeit at a lower level,” says Asad Ahmed, a managing director with Alvarez & Marsal in Dubai.
Loans and advances at the country’s 10 largest banks grew by 10.6 per cent in 2023, compared with growth of more than 14 per cent for the previous two years, according to data compiled by Alvarez & Marsal.
Such a slowdown had been widely anticipated from within the sector, with results coming in slightly higher than the high single-digit figures that had been forecast, given the slowdown in the country’s mortgage market.
Net profits at the country’s top 10 lenders increased by just 11.8 per cent in 2023 — compared with 28.4 per cent the previous year — with the country’s largest lenders Saudi National Bank and Al Rajhi Bank reporting a 7 per cent annual rise and a 3.1 per cent loss respectively.
Net interest income increased by 10.9 per cent on the back of a 100 basis point rise in interest rates for the period. Net interest margins for the sector edged up from 3.0 to 3.1 per cent during the year. Return on assets for the country’s top 10 was unchanged for the year at 2.0 per cent, with return on capital rising from 13.7 to 14.5 per cent for the year.
Rising interest rates have — as around the world — put upward pressure on the cost of funds, which rose to 2.9 per cent in 2023 from just 1.1 per cent the previous year, according to Alvarez & Marsal data, acting as a natural break on lending.
The surge in mortgage lending in recent years has seen the growth in deposits fail to keep pace, obliging the Saudi Central Bank (known as SAMA) to step in with liquidity injections in June and December 2022.
While the loan-to-deposit ratio for the sector’s 10 largest lenders increased from 96.7 per cent in 2022 to 99.2 per cent in September, liquidity pressures have eased over the past year thanks to a rise in deposits from government related entities on banks’ books.
Fitch’s Lopatin told The Banker that GRE deposits had increased by 20 per cent year-on-year at the end of February, and accounted for around a third of all deposits in the system.
While there has been no official announcement by SAMA, Fitch believes that the recent increase in GRE deposits is due to such entities placing their excess liquidity directly with banks rather than with SAMA, including through deposit auctions organised by the central bank.
“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,” Lopatin said in a January note.
It is understood that the new practice does not relate to the central bank’s broader stance on monetary policy.
SAMA declined to comment.
The majority of GRE deposits coming into the banking system over the past year are term, as opposed to CASA, deposits. And while such term deposits in the past were available at next to no cost, they now incur greater charges, thereby forcing banks to be more discerning about lending.
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“When oil prices were higher, the government was content to place excess funds with local banks on a low-cost basis, meaning that banks were able to really squeeze their balance sheets when it came to meeting the huge demand for mortgage lending,” says Ashraf Madani, vice-president and senior credit officer for Moody’s Investors Service in Dubai.
“In the past three years [the cost of funding] has increased more than four-fold, [so] banks are having to incorporate this extra cost into their pricing, which means they have to be more selective about lending.”
The higher cost of funding has been one factor in the acute slowdown in mortgage growth in the past 18 months.
The rise of Saudi Arabia’s retail mortgage market — which has grown from less than 5 per cent of lending assets to around a quarter since 2017 — is a byproduct of the country’s Housing Programme, a Vision 2030 scheme launched in 2018, aimed at increasing homeownership from 47 per cent in 2016 to 70 per cent by 2030, via a series of subsidies and guarantees.
The scheme has been a runaway success thus far, with real estate consultancy Knight Frank estimating that the scheme had already hit the 67 per cent mark in 2023.
Already showing signs of a slowdown in 2022, the mortgage market cooled significantly in 2023, following the reduction of lending subsidies in the early months of the year. Retail mortgage lending fell to SR77.8bn ($20.7bn) in 2023, a 35 per cent drop compared with 2022, and down by half compared with the peak of 2021.
Madani estimates that new mortgage lending will continue to ease to between SR50bn and SR60bn for banks in 2024.
“Retail growth, driven by the mortgage market, has had a number of extremely good years and we still expect mid- to high-single-digit growth for retail in 2024,” said Tony Cripps, CEO of the country’s fourth-largest lender SABB.
“Having invested heavily in the mortgage business, we feel that there is still significant opportunities here as the Kingdom looks to achieve its home ownership targets.”
Another sign of the growing maturity of the mortgage market is the increasing prominence of the Saudi Real Estate Refinance Company (SRC), a wholly owned subsidiary of local sovereign wealth the Public Investment Fund.
Founded in 2017, the SRC is intended to serve as a local equivalent of the US’s Fannie Mae, designed to provide banks and real estate finance companies with liquidity and capital relief, enabling growth in the home financing sector to increase home ownership rates among Saudi citizens, with a view to aggregating and packaging home financing portfolios into mortgage-backed securities.
“In the boom years when the cost of funds was low, banks were very keen to hold on to their mortgage books to boost profitability. Over the past two years, however, as costs have risen and liquidity has tightened, they’ve begun to offload some of their mortgage loans to SRC to free up liquidity and capital,” says Madani.
In recent years, the SRC’s balance sheet has swollen as banks offloaded parts of their mortgage portfolios, growing four-fold to SR31bn in the three years to end-2023. The country’s largest mortgage lender Al Rajhi Bank alone has announced four separate deals with SRC — the latest in January — offloading some SR10.8bn worth of its loan portfolio to free up liquidity.
With mortgage growth relatively subdued, corporate and wholesale lending have overtaken mortgage loans as the primary driver of credit growth for banks. Corporate and wholesale lending grew by 14.4 per cent at the country’s 10 largest lenders in 2023, according to Alvarez & Marsal data, accounting for around 53.4 per cent of aggregate lending for the year.
Such a figure is likely to increase to around 60 per cent in 2024, according to Fitch’s Lopatin, while Madani forecasts that gigaprojects linked to Vision 2030 — including futuristic city Neom and its high profile real estate project The Line — will continue to drive growth in corporate credit in 2024 and beyond.
“Growth will come from a variety of sectors as we saw in 2023, with growth in tourism, construction, energy, and we expect this to continue,” says SABB’s Cripps.
“Certain Vision 2030 programmes will continue to be a catalyst for growth, all of which are in different stages of their lifecycle.”
Direct loans to fund such gigaprojects remains few and far between, with banks’ exposure to such projects largely via credit to subcontractors, according to Lopatin.
“The implementation of many of the gigaprojects is still at quite an early stage, with funding coming from the PIF and other government entities rather than from the banking sector,” he says.
“As these projects progress in the coming years, we may see banks provide more direct working capital.”
Indeed, there are signs that a page may already be turning, as a reduction in oil revenues puts pressure on the country’s gigaprojects. Bloomberg reported in early April that medium-term ambitions for The Line, which the government had hoped would have 1.5mn residents by 2030, have been significantly scaled back, with reports that the budget for Neom for 2024 has yet to be finalised.
Faced with such challenges, the Saudi government appears to be casting around for fresh sources of funding. On April 17, Bloomberg reported that Neom is planning a debut sukuk sale to raise as much as SR5bn as early as the second half of the year. Neom has appointed banks including HSBC Holdings Plc and the securities units of Al Rajhi Bank and SNB to advise on the sale of the sukuk, the newswire reported.
Neom’s CEO Nadhmi Al-Nasr and other government officials were scheduled to host hundreds of bankers at the site in late April to review progress on developments including The Line, vacation spot Sindalah and industrial hub Oxagon, the newswire reported.
Neom declined to comment.
Even if such fundraises do not come to fruition in the near future, there remains plenty of work for Saudi banks to lend to in the coming years, according to Alvarez & Marsal’s Asad.
“The larger projects will, of course, remain important, but there’s likely to be a shift in the short term towards more immediate projects like the Riyadh Expo of 2030 and the Fifa World Cup of 2034, which of course are large projects that require funding and capital in their own right,” he says.
SNB — formed from the merger of National Commercial Bank and Samba Financial Group in 2022 — comfortably remains the largest bank in both Saudi Arabia and the wider Middle East by Tier 1 capital, even as Qatar National Bank retains its status as the region’s largest lender by assets.
The bank’s CEO Talal Al Khereiji is set to be replaced by Tareq Al Sadham, the former head of the country’s third-largest lender Riyad Bank, on May 1.
Mr Al Khereiji, who the bank said in late-March was stepping down due to “personal reasons”, assumed the CEO role in late March 2023, after an abrupt re-shuffle caused by the departure of the bank’s chairman Ammar Al Khudairy. Comments made by Al Khudairy about Credit Suisse — in which SNB was at the time the largest shareholder — were widely seen as triggering a crisis of confidence in the Swiss lender, leading to its eventual acquisition by UBS.
The appointment of Al Sadham, a former KPMG partner and deputy governor of SAMA who sits on the audit commission of the PIF, has been welcomed by analysts.
“In his past role as CEO of Riyad Bank … Al Sadham was instrumental in turning around the sales culture [and] enhancing the brand perception among various stakeholders,” JPMorgan said in a note to clients in late March.
