Arab News, Thu, May 02, 2024 | Shawwal 23, 1445
Saudi banks’ funding profile changing on rising mortgage demand: S&P Global
Saudi Arabia:
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.