High interest rates and tight liquidity conditions have weighed on credit growth in Saudi Arabia’s banking sector, although it remained robust at 10% in 2023, S&P said in a report.
Also, after strong growth over the past few years, new mortgage lending has slowed somewhat. At the same time, deposits have been lagging lending growth.
Saudi banks will likely report strong-but-slower credit growth of 8%-9% in 2024 due to lower mortgage lending growth and tight liquidity. This compares with 10% credit growth reported on Dec. 31, 2023, which was in line with expectations, S&P said. Corporate lending growth will benefit from Vision 2030 projects and the ensuing stronger economic activity, it added.
S&P said it expects mortgage lending growth to slow further in 2024 due to high rates and market maturity. Banks reported year-to-date mortgage lending growth of 8% over Sept. 30, 2023, compared with 19% in September 2022.
Despite high interest rate over the past two years, asset quality indicators were broadly stable. High exposure to mortgages, primarily for government or its related entities employees, and systematic write-offs of impaired retail exposures supported the banks’ NPL ratios in 2023.
Nevertheless, S&P expects high interest rates to start weighing on corporate creditworthiness in 2024. Based on a sample of 150 companies across sectors, leverage increased slightly in September 2023 but remained manageable on average. At the same time, stage 2 loans marginally increased to 5.4% of total loans in September 2023 versus 5.2% in 2022.
The credit growth is expected to support banks’ profitability. The banks’ RoA is likely to stabilize at 2.2%, similar to the estimate for 2023. Toward the second half of 2024, slight margin compression from lower interest rates may be expected. Almost half of Saudi banks’ lending book is corporate loans with floating rates, while almost 50% of the banks’ funding was non-interest-bearing as of December 2023. Corporate loans will reprice downwards leading to some pressure on the banks’ net interest margins. However, as interest rates increased fast over the past 18 months, some impact on corporate creditworthiness is seen leading to higher NPLs, although the impact is likely to be marginal because Saudi corporates have relatively manageable leverage.
Also published on Medium.
