Credit growth in Saudi Arabia’s banks will be led by mortgages that are promoted by the government’s economic overhaul plan ‘Vision 2030’, according to an S&P report.

“We believe that mortgages will spur a pickup in lending over 2020-2021, supported by lower capital charges. However, credit growth will remain moderate,” S&P Global Ratings said in a report on emerging markets’ banking outlook that covers 15 countries including Saudi Arabia.

“The recovery of investment programs and pick-up in gross domestic product (GDP) growth will likely stabilize the cost of risk for Saudi banks in 2020 at about 70 basis points,” the report added.

 While Saudi economic growth remains vulnerable to oil prices, geopolitical factors and global economic conditions, S&P sees resilience in the kingdom as a main credit driver this year along with normalizing credit conditions.

Meanwhile, the outflow of expatriate workers from the kingdom has weighed down on several industries including real estate and retail. The contracting sector has also been under pressure from muted investment. But S&P said that credit conditions are still normalizing.

“Although most problematic exposures have been written off, we do not rule out some volatility in exposure quality,” it said.

The rating agency also assumes that economic recovery in Saudi is picking up with expanding public spending set to boost real GDP to more than 2 percent in 2020 and 2021.

An additional credit driver is the evolving institutional framework in the kingdom, with SAMA (Saudi Arabian Monetary Authority) seen as a ‘strong regulator’.

Last year, SAMA relaxed some regulatory requirements in mortgage lending as the government aims to achieve home penetration rate of 70 percent among its citizens by 2030.

The size of untapped mortgage potential in the kingdom is estimated at around 500 billion Saudi riyals ($133.3 billion), with banks with strong retail franchise most likely to benefit from mortgage growth.

(Reporting by Nada Al Rifai; editing by Mily Chakrabarty)

(nada.rifai@refinitiv.com)

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