Performance indicators of banks in Saudi Arabia should remain healthy this year despite tighter liquidity, as they capitalise on a favourable operating environment amid continued growth momentum in the Arab world’s largest economy, a report has found.
Expansion of the kingdom’s non-oil gross domestic product will help the lenders in further boosting their profitability this year, Fitch Ratings said in the latest report on the Saudi Arabia's banking sector.
“The average operating profit to risk-weighted assets of Fitch-rated Saudi banks was 2.7 per cent in 2022, and we expect non-oil economic growth to support profitability in 2023, driven by government capex, private-sector credit growth, lower unemployment and the government’s ongoing Vision 2030 strategy,” Anton Lopatin, senior director of financial institutions and banks at Fitch, said.
Saudi Arabia had the highest annual growth rate among the world’s 20 biggest economies in 2022 after its gross domestic product expanded 8.7 per cent on higher oil revenue and a robust non-oil private sector.
This year, the International Monetary Fund expects the kingdom's overall real GDP growth to moderate to 2.1 per cent. The World Bank has estimated 2023 growth at 2.2 per cent, as the kingdom caps oil output as part of its commitments to the Opec group of oil producers.
Business activity in the kingdom’s non-oil private sector economy remained robust last month as output and new business continued to expand, further supporting employment growth in the kingdom in the second quarter.
The reading for Saudi Arabia on the Riyad Bank purchasing managers' index rose to 59.6 in June, from 58.5 in May, well above the neutral 50-point mark that separates growth from contraction.
The annual inflation rate in Saudi Arabia also fell slightly to 2.7 per cent last month, from 2.8 per cent in May, according to official data.
Although Fitch expects private sector financing growth to slow to about 12 per cent this year from 14 per cent in 2022, it will remain above the GCC average of estimated 5 per cent to 6 per cent this year.
“Strong demand for mortgage financing, underpinned by a state subsidy programme, has supported financing growth in recent years,” Fitch said.
“Mortgage financing reached 567 billion Saudi riyals [$151.2 billion] at end-1Q23, with a compound average growth rate of 35 per cent over the past five years.”
The new quarterly mortgage issuance peaked at 49 billion riyals in the first quarter of 2021, but has since fallen to 23 billion in the first quarter of this year amid rising interest rates and market saturation.
“We expect further declines in 2023 and 2024 due to the recent reduction in state subsidies for mortgages,” Fitch said.
The rating agency said liquidity conditions in the kingdom tightened moderately in 2022, as the banking sector’s financing growth reached 14 per cent, exceeding deposit growth of 9 per cent.
“Rising interest rates led some customers to shift low-cost current account and savings account (Casa) deposits into term deposits,” Fitch said. “Sector's Casa deposits accounted for 56 per cent of total deposits at end-1Q23, down from 65 per cent at end-2020.”
Tighter liquidity in the system also pushed up the average cost of funding for Fitch-rated Saudi banks to 110 in 2022.
However, the Saudi authorities are expected to “continue deploying liquidity into the system, when needed, to support financing growth, as the supply of credit is key to the execution of Vision 2030”, Fitch said.
