Saudi Banks' Shifting Funding Landscape: Mortgage Boom and External Debt
Saudi banks are expected to increase their use of alternative funding sources due to a surge in mortgage lending driven by a government initiative to boost home ownership, according to S&P Global.
Mortgage financing accounted for 23.5% of total credit allocation in 2023, up from 12.8% in 2019.
The need to finance the Vision 2030 economic initiative and slow deposit growth are likely to encourage banks to seek external funding.
The text discusses a report by S&P Global that warns of potential credit quality issues in Saudi Arabia's banking sector due to the pursuit of external funding.
The loan-to-deposit ratio in Saudi banks has exceeded 100 percent in 2022, up from 86 percent in late 2019, indicating that lending growth has outpaced deposit growth.
The report anticipates this trend to continue, with corporate lending playing a larger role in growth.
To fund this expansion, Saudi banks are expected to turn to alternative funding strategies.
The text discusses the prediction by S&P Global that Saudi banks' foreign liabilities will increase, reaching about $19.2 billion by the end of 2023 to fund strong lending growth.
Despite the maturity mismatch risk, the agency believes it is mitigated by the stability of Saudi deposits.
Saudi banks have already turned to international capital markets for funding and are expected to continue doing so for the next three to five years.
This trend could result in the Saudi banking system transitioning from a net external asset position to a net external debt position within a few years.
In April, S&P Global predicted that Saudi Arabian banks would experience strong credit growth of 8-9% in 2024.
This growth is attributed to corporate lending, which is being driven by increased economic activities due to the Vision 2030 program.
Additionally, the Saudi government and its related entities are expected to deposit money into the banking system, boosting credit growth for financial institutions in the Kingdom.