Potential bad debt securitization will support Saudi Arabian banks' liquidity profiles and capital ratios and develop the debt capital market, according to Fitch Ratings.

Impaired loans, known as stage 3 loans under IFRS 9, fell to SAR 41 billion ($10.93 billion) in 2024, 1.4% of total loans, down from SAR 49 billion at the end of 2022. The drop was due to loan write-offs and reduced generation of problem loans on the back of the healthy operating environment. 

New impaired loans were about SAR10 billion in 2024 compared to SAR14 billion in 2023 and SAR 16 billion in 2022.

Banks are also likely to opt for securitising written-off exposures. However, the par value of the associated bonds would be low as most of the exposures are deeply impaired. Banks wrote off SAR 43 billion of debt in 2022-2024.

Domestic lenders are also expected to start securitizing more residential mortgage loans. This will have a big impact on funding diversification and the development of the debt capital markets, as the combined mortgage book of Saudi banks is about SAR 700 billion. 

However, the banking sector is expected to see a credit growth of 12-14% in 2025, as lending will outpace deposits.

This will widen the deposit gap, which reached SAR 300 billion in 2024, Fitch said. 

“Even if all bad loans are securitised, the gap will not shrink much,” it added.

(Editing by Seban Scaria seban.scaria@lseg.com)