Despite the prospects of rapid expansion over the next 12 to 24 months risks to the stability of the Kingdom of Saudi Arabia's (KSA) banking system will remain contained, S&P Global Ratings have said.
“We expect Saudi Arabia's improving GDP growth and fiscal trajectory will continue, tied to the country's emergence from the Covid-19 pandemic, ongoing structural reforms, and improving oil sector dynamics. Domestic credit growth will likely stay strong in 2022-2023 following the sharp 15% increase in 2021. We expect 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 release.
Over the next few years, S&P forecasts total credit growth at 10%-12%. Under its base-case scenario, S&P expects domestic private-sector credit to reach 90%-95% of GDP in 2022-2023 versus 68.8% in 2019.
Cost of risk
The cost of risk will stabilise close to pre-Covid-19 levels after declining in 2021. Higher write offs and buoyant lending growth helped to reduce the nonperforming loan ratio. It will remain stable because anticipated growth will remain strong and banks will continue writing off loans when appropriate, the ratings agency said.
The Saudi banking sector is subject to adequate regulation under the supervision of the Saudi Central Bank (Sama). Sama has consistently encouraged banks to proactively build strong loan loss provision buffers and has been instrumental in helping banks manage volatility in less favourable liquidity conditions over the past two years.
Saudi banks benefit from a low-cost and stable core deposit base, with limited reliance on external debt. Low cost of funds and better-than-average cost of risk have supported the banking sector's profitability.
“We don't expect the sector's profitability to be challenged by recent competitive developments, such as the licensing of three online banks, approval for a telecommunications company to convert its payments business into a digital bank, or the opening of branches of foreign banks in Saudi Arabia,” S&P said.
This is because Vision 2030 has created sufficient room for the sector's growth; bank customers, particularly corporate entities, continue to show a preference for traditional banking; and the telecom's focus is on a market niche.
What's more, banks' healthy funding and liquidity profiles as a key differentiator compared with most other banking systems in the region and globally. It remains to be seen whether challenger banks will stoke competition on the funding side and accelerate the migration of deposits to remunerated instruments.
The trend for economic risk is stable. Although the banking sector is expanding rapidly, the buildup of imbalances will remain contained, since the increase in real estate prices remains low in real terms, real estate demand is mostly local, and the majority of mortgage loans are backed by salary assignments. The increase in debt will also be alleviated by accelerating economic growth, it added.
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