Despite prospects for rapid expansion over the next 12 to 24 months, risks to the stability of the banking system in the Kingdom of Saudi Arabia (Saudi Arabia) will remain contained, S&P Global Ratings said.

“We expect the improvement in Saudi Arabia’s GDP growth and fiscal trajectory to continue, linked to the country’s exit from the Covid-19 pandemic, ongoing structural reforms and improved dynamics in the oil sector Domestic credit growth is likely to remain strong in 2022-2023 after the strong 15% increase in 2021. We expect the government’s efforts to meet its Vision 2030 targets and strong demand for housing from Saudi nationals will support loan growth,” S&P said in a statement.

Over the next few years, S&P expects total credit growth of 10-12%. In its baseline scenario, S&P forecasts credit to the domestic private sector to reach 90% to 95% of GDP in 2022-2023 from 68.8% in 2019.

Cost of risk

The cost of risk will stabilize near pre-COVID-19 levels after declining in 2021. Higher write-offs and sustained loan growth have helped lower the NPL ratio. It will remain stable as expected growth will remain strong and banks will continue to write off loans as needed, the rating agency said.

The Saudi banking sector is subject to adequate regulation under the supervision of the Saudi Central Bank (Sama). Sama has always encouraged banks to proactively build strong loan loss provisions and has been instrumental in helping banks manage volatility under less favorable liquidity conditions over the past two years.

Saudi banks benefit from a stable, low-cost core deposit base, with limited reliance on external debt. The low cost of funds and an above-average cost of risk have supported the profitability of the banking sector.

Profitability intact

“We do not expect the profitability of the sector to be challenged by recent competitive developments, such as the licensing of three online banks, the approval of a telecommunications company to convert its business from payment in a digital bank, or the opening of branches of foreign banks in Saudi Arabia,” S&P said.

Indeed, Vision 2030 has created enough space for the growth of the sector; bank customers, in particular legal entities, continue to favor traditional banking; and telecoms focus on a market niche.

Additionally, the banks’ healthy funding and liquidity profiles are a key differentiator from most other banking systems in the region and globally. It remains to be seen whether the challenger banks will fuel competition on the funding side and accelerate the migration of deposits to interest-bearing instruments.

The economic risk trend is stable. Although the banking sector is developing rapidly, the build-up of imbalances will remain contained, as the rise in real estate prices remains weak in real terms, real estate demand is mainly local and the majority of real estate loans are backed by salary. The increase in debt will also be mitigated by accelerating economic growth, he added.

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