Mortgage lending fueling Saudi banks retail drive: Fitch

In the Kingdom, retail loans accounted for 38 percent of total lending in March 2020, up from 31 percent at the end of 2016.

Fitch said that credit growth in the sector increased 11.5 percent as of September last year, driven mainly by a 41 percent growth in retail mortgage lending. “We expect fast growth in this segment to continue, underpinned by strong credit demand and support from the authorities,” the agency said in the report.

The huge increase in demand for mortgages is part of the Saudi government’s plan to increase home ownership in the Kingdom to 70 percent as part of Vision 2030 targets, up from 50 percent in 2018.

Factors supporting this trend include attractive margins and government subsidies on retail mortgages. Returns on retail portfolios are underpinned by impressively low funding costs, with loans largely funded by non-interest-bearing deposits and the absence of caps on loan pricing.

Banks with a larger portion of retail lending therefore have profitability metrics at the higher end of the sector, according to the report.

The Kingdom is the largest market in the GCC, with a population of 34.2 million. About 75 percent of Saudis aged over 15 have a bank account. “Saudi Arabia also has the lowest portion of retail loans relative to gross domestic product, which gives it strong potential for growth,” the report added.

The credit ratings agency also said about 70 percent of Saudi workers are public sector employees and account for 80 to 95 percent of retail loans books for retail banks, representing higher loan quality for lenders.

“Asset quality is also underpinned by a safe retail lending structure, in which almost all lending is salary-assigned and loan repayments are deducted from a borrower’s salary prior to being remitted,” the report added.