Saudi banks need more funding to finance Vision 2030

• Funding will need to look beyond Saudi banks
• Loan-to-deposit ratio exceeded 100% in 2022
• Important banks can receive ‘extraordinary support’

The Saudi banking system cannot provide enough funding alone to finance the kingdom’s ambitious Vision 2030 and will require a combination of developing the local capital market and tapping international markets, S&P said on Wednesday.

While the banking sector has seen rapid growth over the past few years, primarily driven by mortgages, deposit growth has not kept pace to fund this expansion, leading the loan-to-deposit ratio to exceed 100 percent at the end of 2022, the ratings agency said in a research note.

• New wave of Saudi spending is no cause for concern
• Saudi banks face liquidity pressures as economy grows
• Saudi giga-projects may tap into debt market funding

Dr Mohamed Damak, senior director and head of Islamic Finance at S&P Global Ratings, said although Saudi banks will continue to play a key role in financing Vision 2030 projects, additional resources in the form of deposits or local and international issuances are also needed.

He added that S&P views the Saudi authorities as highly supportive toward their banking system and expect that “systemically important banks will receive extraordinary support if needed”.

Private sector deposit growth has averaged about 5 percent over the past five years, compared with 14 percent growth in deposits from the government and its related entities. However, in the first quarter of 2023, government sector deposit growth has slowed to an annualised 10 percent. 

S&P said that the government still held significant deposits with the Saudi Central Bank (Sama) of SAR637.5 billion ($170 billion) at the end of last year. This could theoretically ease liquidity constraints by placing more deposits with the banking system. 

In 2022, Sama reacted to liquidity stress by intervening and injecting SAR50 billion, and S&P said it expects the central bank to “continue providing banking system liquidity when required”.

This chimes with the view of other analysts, who told AGBI last month that Sama may step in to provide funding to local banks for a second time to ease liquidity pressures and keep the economy growing.

S&P noted that the government has created the infrastructure for banks to divest their mortgage portfolios and improve the structure of their balance sheets. 

However, banks are yet to sell large volumes of mortgages because a significant portion of them are low risk.

Additionally, with the increase in interest rates, any divestment from fixed-rate mortgages could result in some revaluation losses, the ratings agency added.

From a risk perspective, S&P said it is unclear if lending to help with funding of Vision 2030 projects would increase the concentration of Saudi banks’ lending books, adding that this is already a source of risk both for Saudi banks and in the wider GCC.