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Banks in Saudi Arabia will likely benefit from the expected increases in interest rates, as these changes will be earnings-accretive for the banks because of the structure of their balance sheets, according to a report by S&P Global Ratings.
The U.S. Federal Reserve is expected to raise rates six times this year (including one that already took place in March), and five more times in total in 2023 and 2024, the rating agency said.
A steeper increase would lead to higher finance charges and lower-than-expected credit growth, the agency said. "For every parallel shift upward in interest rates of 100 basis points, we expect a rise in net profit of 13%.”
The corporate sector, which is often financed with variable interest rates, must be able to cope with the gradual increase in interest rates.
Despite the unclear vision about the SME credit quality, S&P expects that the government support will continue, especially the Kafalah Program, which will mitigate the effects of higher interest rates, if any.
According to the report, the credit growth is expected to remain strong at nearly 12% in 2022, and the mortgage growth would begin to moderate in 2022 as the market becomes more saturated.
In addition, there would be low appetite for mortgages due to the increase in household debts and high cost of mortgages.
S&P further stated that the increase in the contracts related to Vision 2030 projects and private sector support programs would enhance corporate demand for credit. It also expects credit growth to return to normal level at about 10% by 2023.
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