Saudi Banks Growth Momentum Continues

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. SAMA has also launched affordable mortgage schemes, such as Sakani Programme 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).

— muzaffarrizvi@khaleejtimes.com