Resilient Banking Performance in Saudi Arabia: Navigating Tighter Liquidity Amid a Favorable Economic Landscape
Banks in Saudi Arabia Set for Healthy Performance Amid Favorable Economic Environment.
Despite tighter liquidity, the performance indicators of banks in Saudi Arabia are projected to remain robust this year, capitalizing on a favorable operating environment and sustained growth momentum in the largest economy in the Arab world, as revealed in a recent report.
The expansion of the kingdom’s non-oil gross domestic product is poised to provide further impetus to the profitability of lenders in the current year, according to insights from Fitch Ratings in its latest report on Saudi Arabia’s banking sector.
Fitch noted that the average operating profit to risk-weighted assets ratio for Fitch-rated Saudi banks stood at 2.7 percent in 2022. Anticipated non-oil economic growth in 2023 is expected to bolster profitability, propelled by factors such as government capital expenditure, credit expansion in the private sector, a reduction in unemployment, and the continued implementation of the government’s Vision 2030 strategy. Anton Lopatin, Senior Director of Financial Institutions and Banks at Fitch, highlighted these trends.
Saudi Arabia secured the highest annual growth rate among the world’s top 20 economies in 2022, with an 8.7 percent expansion in its gross domestic product attributed to increased oil revenue and a robust non-oil private sector. While the International Monetary Fund predicts a moderation in the kingdom’s overall real GDP growth to 2.1 percent this year, the World Bank estimates a growth rate of 2.2 percent for 2023.
This adjustment comes as Saudi Arabia adheres to its commitments within the OPEC group of oil producers, leading to constraints on oil output.
The non-oil private sector of the kingdom’s economy sustained strong business activity in the previous month, characterized by expanding output and new business opportunities, which in turn supported employment growth in the second quarter. In June, Saudi Arabia’s Riyad Bank purchasing managers’ index climbed to 59.6 from May’s 58.5, comfortably above the neutral 50-point threshold that distinguishes growth from contraction.
The country’s annual inflation rate witnessed a minor decline to 2.7 percent the previous month, down from May’s 2.8 percent, according to official data. Despite Fitch’s expectation of a reduction in private sector financing growth to approximately 12 percent this year from 2022’s 14 percent, the growth rate will still surpass the estimated 5 to 6 percent average for the GCC region this year.
Fitch attributed this sustained growth to robust demand for mortgage financing, buoyed by a state subsidy program. Notably, mortgage financing reached 567 billion Saudi riyals [$151.2 billion] by the end of the first quarter of 2023, exhibiting a compound average growth rate of 35 percent over the past five years.
Although the quarterly mortgage issuance reached its peak at 49 billion riyals in Q1 2021, it subsequently receded to 23 billion in the first quarter of the current year due to rising interest rates and market saturation. Fitch anticipates further declines in the coming years due to reduced state subsidies for mortgages.
Fitch observed a moderate tightening of liquidity conditions in Saudi Arabia during 2022, as financing growth within the banking sector outpaced deposit growth (14 percent vs. 9 percent).
This led to some customers shifting low-cost current and savings account (Casa) deposits to term deposits, resulting in Casa deposits accounting for 56 percent of total deposits at the end of the first quarter of 2023, down from 65 percent at the close of 2020.
In light of these developments, the average cost of funding for Fitch-rated Saudi banks rose to 110 in 2022 due to tighter liquidity within the system. However, Fitch anticipates that the Saudi authorities will continue to infuse liquidity into the system as needed to support financing growth, recognizing that a robust supply of credit is integral to the successful execution of Vision 2030.
Source: The National