Saudi banks may see their capital positions come under pressure if current lending and funding trends continue, according to a recent analysis by S&P Global Ratings, which highlights evolving risks as the Kingdom’s financial sector supports robust credit growth.

The report notes that lending expansion in areas such as corporate and mortgage financing has outpaced local deposit growth, prompting many banks to increasingly tap international capital markets to meet funding needs, a strategy that could weigh on capital metrics if not carefully managed.

Although Saudi banks enter this phase with relatively strong capitalization, the shift towards alternative funding sources reflects a changing risk profile as the sector adapts to sustained demand for credit.

S&P’s assessment points to the surging role of external funding, particularly in the form of bond issuances and foreign liabilities, as a response to domestic deposit shortfalls.

Over the past several years, net external debt for some lenders has moved from asset-rich positions into modest net external debt, signalling a broader transition in balance sheet structure.

Short-term interbank deposits and repurchase agreements have comprised a significant portion of foreign funding, raising questions about potential maturity mismatches and volatility risks, though S&P also acknowledges that much of this funding originates from within the Gulf Cooperation Council, where liquidity is strong.

The agency also highlights that mortgage lending, driven by government initiatives to expand home ownership, has grown sharply as a share of total bank credit, reinforcing the importance of managing funding and capital adequacy amidst rapid credit expansion.

To bolster capital positions, a number of banks have issued hybrid instruments such as additional tier 1 sukuk, helping strengthen regulatory capital ratios while attracting diverse investor bases.

S&P underscores that while current capital adequacy remains robust, with healthy buffer levels reported across the sector, continued reliance on external financing and hybrid instruments will require careful monitoring to preserve resilience.

Despite these risks, the report suggests that Saudi Arabia’s banking system has strong fundamentals, including solid profitability, resilient deposit bases and substantial sovereign backing, which together provide a cushion against short-term volatility.

S&P also expects that the growth trajectory under the Kingdom’s Vision 2030 reform agenda will maintain attractive lending opportunities for banks, underscoring the need for prudent risk management and diversified funding strategies as financial intermediation continues to expand.