High interest rates, tight liquidity weigh on Saudi banks

Arabian Publish Employees

Excessive rates of interest and tight liquidity situations have weighed on credit score development in Saudi Arabia’s banking sector, though it remained sturdy at 10% in 2023, S&P stated in a report.

Additionally, after sturdy development over the previous few years, new mortgage lending has slowed considerably. On the similar time, deposits have been lagging lending development.

Saudi banks will doubtless report strong-but-slower credit score development of 8%-9% in 2024 because of decrease mortgage lending development and tight liquidity. This compares with 10% credit score development reported on Dec. 31, 2023, which was consistent with expectations, S&P stated.  Company lending development will profit from Imaginative and prescient 2030 initiatives and the following stronger financial exercise, it added.

S&P stated it expects mortgage lending development to sluggish additional in 2024 because of excessive charges and market maturity. Banks reported year-to-date mortgage lending development of 8% over Sept. 30, 2023, in contrast with 19% in September 2022.

Regardless of excessive rate of interest over the previous two years, asset high quality indicators had been broadly secure. Excessive publicity to mortgages, primarily for presidency or its associated entities workers, and systematic write-offs of impaired retail exposures supported the banks’ NPL ratios in 2023.

However, S&P expects excessive rates of interest to start out weighing on company creditworthiness in 2024. Primarily based on a pattern of 150 firms throughout sectors, leverage elevated barely in September 2023 however remained manageable on common. On the similar time, stage 2 loans marginally elevated to five.4% of whole loans in September 2023 versus 5.2% in 2022.

The credit score development  is anticipated to help banks’ profitability. The banks’ RoA is prone to stabilize at 2.2%, just like the estimate for 2023. Towards the second half of 2024, slight margin compression from decrease rates of interest could also be anticipated. Nearly half of Saudi banks’ lending e book is company loans with floating charges, whereas nearly 50% of the banks’ funding was non-interest-bearing as of December 2023. Company loans will reprice downwards resulting in some strain on the banks’ internet curiosity margins. Nevertheless, as rates of interest elevated quick over the previous 18 months, some influence on company creditworthiness is seen resulting in larger NPLs, though the influence is prone to be marginal as a result of Saudi corporates have comparatively manageable leverage.

Additionally revealed on Medium.