Saudi bank fundamentals to remain strong, but profit growth to slow: S&P

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Saudi banks will likely maintain strong fundamentals as saturation of the mortgage market is set to slow down demand,  S&P Global said. 

However, corporate lending will boost credit growth in the remainder of 2023 and in the medium-term. 

The ratings agency also expects earnings growth to slow in 2023, primarily due to lower credit growth and higher impairment charges.  

Meanwhile, smaller banks will likely buck the mortgage lending trend in the medium term, while larger banks' will see mortgage growth slow down. Higher interest rates will soften total lending growth to 10% in 2023, compared to 14% in 2022, the ratings agency stated. 

On the positive side, S&P forecasts improved margins, despite banks focusing primarily on the retail segment facing some negative pressures on margins. Moreover, the shift to long-term deposits will partially balance the benefits from high yields on corporate loans. 

S&P forecasts the return on assets (ROA) for Saudi banks to reach 2.2% in 2023, surpassing the GCC average of 1.8%. It further expects Saudi banks' asset quality metrics to remain better than the peer average, due to a high exposure to government-backed mortgage lending.  

The non-performing loans (NPLs) ratio for Saudi banks will stand at 2.1%, while credit costs will reach 60 basis points (bps), compared to 3.5% for NPLs and 90 bps for its GCC peers.