Saudi Banks Growth Momentum Continues

Local lenders enjoying lower delinquencies in their loan portfolios, while provisions cover non-performing loans fully

By Muzaffar Rizvi

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Saudi banks are enjoying lower delinquencies in their loan portfolios, while provisions cover non-performing loans fully.

Published: Mon 23 Sep 2024, 10:30 AM

Saudi banking sector is one of the major beneficiaries of economic diversification drive which aims at reducing reliance on hydrocarbon revenue. The kingdom’s policy to diversify its economy is benefitting the sector, with industries such as construction and tourism offering appealing lending opportunities, says a report.

In its latest report, the US-based credit rating agency Moody’s said that the performance of the banking sector’s loan portfolio has continued to improve amid a favourable operating backdrop in the kingdom. The performance of the Saudi banking sector’s loan book, which accounts for 65 per cent of total banking assets as of June 2024, is expected to sustain the positive trend in the coming months, according to the report.

“We expect this trend to persist over the coming 12 to 18 months, further boosting the non-hydrocarbon economy where banks largely operate. Saudi borrowers’ repayment capacity is also supported by government policies and reforms,” according to Lea Hanna, an analyst at Moody’s.

Saudi banks are enjoying lower delinquencies in their loan portfolios, while provisions cover non-performing loans fully; however, they remain exposed to downside risks should there be a reversal in economic momentum or a relaxation in authorities’ active support in managing system asset risks, the report said.

Reforms and regulatory initiatives

Following strong growth, mortgages now account for around half the consumer book and 23 per cent of total system loans. Favourable employment prospects, supported by the strength of the sovereign, a key employer, are also boosting performance in retail lending.

The General Authority for Statistics reported a year-on-year fall in unemployment among Saudi citizens to 7.6 per cent at the end of March 2024 from 12.6 per cent. The overall unemployment rate also dropped to 3.5 per cent as of March 2024, from 7.4 per cent in 2020.

The introduction of new mortgage and financing laws, together with SAMA’s strong oversight of the market continue to support loan performance. The credit bureau (SIMAH) has also issued responsible lending principles aimed at improving transparency and fairness for the consumer, while encouraging more appropriate lending practices. Examples include setting a cap of 65 per cent on the debt-burden ratio (DBR) to ensure borrowers have sufficient disposable income after servicing their debts.

At the same time SAMA, has launched affordable mortgage schemes, such as Sakani Program or Saudi Mortgage Guarantee Services Company (Dhamanat), to encourage home ownership among Saudi nationals by providing financing guarantees to banks. These reforms and regulations, combined with increased business activity driven by the national diversification agenda, are supporting borrowers repayment capacity across the three segments of the loan book - corporate, SMEs and retail (lending to individuals).

PROMISING OUTLOOK

Benign operating environment supported by economic expansion: We estimate that real non-hydrocarbon GDP will grow strongly, by around 5.5 per cent in both 2024 and 2025, driven by government spending on large infrastructure projects. Saudi’s favourable macroeconomic backdrop will drive demand for credit in 2024, particularly in the corporate sector as mortgage lending slows.

Performance of the loan book remains strong: Saudi banks’ non-performing loans ratio already compares favourably with GCC banking systems because of the strong regulator’s effective supervision and continues to decline on lower delinquencies and high growth. Provisions fully cover nonperforming loans.

Corporate lending driven by Govt-led projects, new sectors: Lending to lower risk government-backed projects and creditworthy conglomerates will enhance the performance of the corporate book. Although construction will remain a key sector for the economy, diversification into new sectors such as tourism, entertainment and renewable energy provide attractive lending opportunities.

Reforms and regulatory initiatives in consumer lending support asset quality: Favourable employment prospects, supported by the strength of the sovereign, a key employer, are also boosting performance in retail lending. The introduction of new mortgage and financing laws, together with SAMA’s strong oversight of the market continue to support loan performance.

— muzaffarrizvi@khaleejtimes.com