Saudi banks likely to require further liquidity support from SAMA: Fitch

Saudi Arabian banknotes

Saudi banks are likely to require further central bank liquidity injections from the Saudi Central Bank (SAMA).

In a recent report, Fitch said this is likely to be driven by lending growth that continues to outpace deposit growth. Sector loans increased by 12.5% in the first nine months of 2022, compared with 8% for deposits, which led the loans/deposits ratio (LDR) for Saudi banks collectively to rise to 102.2%, the highest level in at least 15 years.

Without liquidity support, lending growth could be muted in Q4 2022, which lowers Fitch’s 2023 loan growth forecast of 12%, while banks’ cost of funding will continue to increase.

Despite strong credit demand with corporate and retail loans up 13.5% and 11.4%, respectively, in the first nine months of 2022, corporate credit demand is underpinned by large infrastructure projects under the Saudi Vision 2030 framework to diversify the economy.

Government initiatives to reach 70% home ownership by 2030 should support further growth in retail mortgages, Fitch added.

Banks could also use medium-to long-term funding to finance growth through subordinated debt, additional Tier 1 (AT1) securities or senior unsecured issuance. However, this would weigh on banks’ cost of funding and would not meet high financing demand from borrowers.

Saudi banks’ earnings could come under pressure should domestic liquidity remain tight. “However, this is not our base case for most banks as profitability will remain underpinned by higher net interest margins (especially for corporate-focused banks) and non-interest revenues as assets grow, and by lower loan impairment charges as economic conditions remain solid,” Fitch concluded.