Lending from companies enhances the growth of bank credit in Saudi Arabia by 10%

An economic report expected that lending would witness strong growth of about 10%, driven primarily by lending to companies resulting from the implementation of the Kingdom’s Vision 2030 projects.
The report indicated that the real GDP is expected to achieve strong growth of 4% on average in the period from 2025-2027, compared to about 0.8% in 2024, in light of the diversification of the economy away from oil.
The report pointed out that Saudi Vision 2030 initiatives are expected to enhance non-oil growth in the medium term, thanks to increased construction activity and the growth of the services sector supported by increased demand from consumers and an increasing workforce.
He pointed out that female participation in work has risen and stabilized at 36% since 2022 from 17% in 1999.

GDP

According to the report, the tourism sector, which contributes about 4% of GDP and 99% of current account revenues in 2023 versus 5% in 2022, shows significant growth potential through simplified visa procedures and more entertainment options.
The report explained that the financial risks resulting from the government and the Public Investment Fund’s increase in debt issuance are expected to be mitigated through the recalibration of some large infrastructure projects.
The report expected that the government would maintain a net asset position exceeding 40% of GDP until 2027.

Mortgage lending growth

At the same time, growth is expected to get a strong boost thanks to lower interest rates and demographic expansion that supports demand for residential properties.

Non-performing loans

The report expected a decline in the formation of non-performing loans due to lower interest rates, indicating that non-performing loans are likely to increase to about 1.7% of system-wide loans by the end of 2025 from 1.3% in September 2024, as no significant write-offs are expected.
According to the report, credit losses are likely to reach between 50-60 basis points in the next 12-24 months, thanks to the comfortable reserves of provisions held by banks.
The report expected that credit growth would enhance banks’ profitability, and that return on assets would stabilize at 2.2-2.1%.
He pointed out that the net interest margin is expected to decrease between 20-30 basis points by the end of 2025 compared to 2023, with the Saudi Central Bank following the US Federal Reserve’s interest rate cuts to maintain its currency peg.

Corporate loans

According to the report, corporate loans with largely variable interest rates (50%) of total loans will quickly be repriced, leading to lower interest income, which is partially offset by fixed-rate and long-term mortgage financings (25%) of the total.
He stated that with lower interest rates, local companies are expected to increase their indebtedness, with debt continuing to accumulate in the private sector, which will contribute to strong growth in corporate lending.
The report expected higher levels of indebtedness, while the total private sector debt to GDP will remain less than 150% in the medium term.

Bank assets

He explained that this is likely to have repercussions on banks’ asset quality metrics in the long run, while lower interest rates will lead to a decline
Funding costs, a sharp decline may lead to a shift in consumer preferences towards demand deposits, affecting overall bank financing.
According to the report, lending growth exceeded deposit growth, prompting banks to search for alternative financing sources, and in the second half of 2024, the banking system shifted to a net external debt position, close to 1% of total loans.
He expected that the accumulation of external debt would continue during the next two years, in addition to the fact that the Saudi Central Bank would likely intervene in the event of a liquidity shortage.
He stated that Saudi banks are expected to continue to rely on external financing due to investment needs linked to the Kingdom’s Vision 2030, although recent real estate financing-backed securities initiatives may help.

Real estate financing

He pointed out that the Saudi Real Estate Refinancing Company, Hassana’s initiatives to issue securities backed by residential real estate financing, and the Saudi Real Estate Refinancing Company’s agreement with BlackRock could help attract local and foreign capital and free up liquidity to support the Kingdom’s Vision 2030.
The Saudi banking sector witnessed mergers that led to the emergence of dominant “national companies”. Although this led to a concentration of market share and increased competitive pressures on smaller institutions, the overall dynamics of the sector remained strong in terms of overall financial stability.
He noted that the trend of economic risks is stable, as the stability of the trend of economic risks reflects strong asset quality indicators at banks and moderate economic imbalances, with a limited increase in real estate prices adjusted for inflation.
According to the report issued by S&P Global, the sectoral risk trend is stable, which means that the central bank will continue to closely supervise the banking system and the risk-adjusted profitability of banks, while its net external debt position remains manageable.