Saudi banks seen to maintain strong lending growth: S&P

S&P Global Ratings projects that Saudi banks will maintain strong lending growth fueled by the financing needs relating to Vision 2030. Banks will also continue to tap external funding sources to fund their growth.

However, the agency expects banks' profitability to deteriorate slightly due to lower interest rates, while their asset quality indicators should normalize due to lower write-offs. Risks could stem from a significant and prolonged decline in oil prices or a spike in geopolitical risk.

Economic growth prospects remain broadly supportive in Saudi Arabia, with both non-oil and hydrocarbon-related activities playing a role. Supporting this growth are rising household consumption, increased oil output following a relaxation of OPEC+ quotas, and the Public Investment Fund's significant investments in diversification projects, which reach above $40 billion annually.

An unexpected and significant drop in Brent oil prices below the agency's assumption of $60 per barrel in 2026, or a substantial spike in geopolitical risk in the region, may affect Saudi Arabia's economic growth prospects and reduce lending opportunities for the banking sector.

"However, this is not our base-case scenario, and we expect banks' lending books to continue performing strongly, with 10% expansion in 2026 compared with 11% in the year to Nov. 30, 2025," S&P said.

According to the report, corporate lending will likely continue to benefit from the opportunities arising from Vision 2030 projects. "We expect Saudi banks to extend $65 billion-$75 billion in new corporate loans in 2026, fueled by high investments, primarily in the real estate and utilities sectors. New corporate loans amounted to $70 billion between Dec. 31, 2024, and Nov. 30, 2025," the agency noted.

Another area of growth for banks is retail lending, especially mortgages, particularly as interest rates continue to decline. Retail lending--of which mortgages constitute roughly half--rose by 5% in the year to Nov. 30, 2025. "We anticipate that it will increase by nearly $20 billion in 2026 from $18 billion as of Nov. 30, 2025," S&P said.

It expects the Saudi government and its related entities to continue injecting deposits into the banking system to support credit growth. Government and government-related entity (GRE) deposits reached 32% of total deposits by November 2025, up from almost 20% in 2020, outpacing the growth in private-sector deposits.

However, deposits were not sufficient to fully fund the expansion of the lending book. As such, the agency expects banks’ loan-to-deposit ratios to continue increasing from 113% at the end of November 2025.

"We foresee that banks will continue to resort to external debt to bridge the gap. This will lead to a rise in net external debt as a proportion of total loans from 6% as of November 2025, which we view as manageable," S&P said.

Stronger liquidity in the international capital markets and lower interest rates will also help. The latter could encourage banks to either start actively divesting mortgages to Saudi Real Estate Refinance Co., or issuing residential mortgage-backed securities to create financing headroom on their balance sheets.

It also expects Saudi banks' asset quality indicators to remain strong in a regional comparison. However, the banking sector's nonperforming loan (NPL) ratio will likely reach 1.6%-1.7% in 2026, with a cost of risk of 55-60 basis points (bps), up from 1.1% and approximately 25 bps on an annualized basis for the year to Sept. 30, 2025.

Banks' cost of risk is normalizing following the strong recoveries they have recorded over the past few years. Nevertheless, banks' exposure to riskier sectors--such as micro, small, and midsize enterprises--and the likelihood of lower write-offs will increase the NPL ratio.

On the retail side, borrowers' salaries typically secure the exposures, and the risk of job losses in Saudi Arabia is very low, especially for government and GRE employees.

"As for corporate lending, we understand that banks have sustained growth in recent years without compromising either their risk appetites or their lending and underwriting standards," the agency said. "However, Saudi banks have issued $379 billion in new loans over the past five years in a supportive economic environment. An unexpected deterioration in the environment could test these loans and lead to higher NPLs."

Greenfield projects represent a significant portion of Saudi Arabia’s $1 trillion-plus investment pipeline. While these initiatives support the country's long-term economic transformation, they carry elevated execution, cost-overrun, and operational risks. Over time, this may increase banks' asset quality sensitivity across the projects' value chain, encompassing contractors, suppliers, and project developers.

"We expect banks' profitability to remain strong. However, it will likely decline slightly due to lower interest rates. We expect that strong lending growth will partly mitigate the pressure on net interest margins, which we believe will contract only slightly," the agency said.

This contraction, coupled with a higher cost of risk, means that the agency expects banks' return on average assets to dip slightly to 2.2% in 2026. "We expect banks to continue to invest in digitalization to further optimize their operating efficiency," it noted.

Saudi banks’ capitalization remains strong. Rated Saudi banks had a tier 1 capital adequacy ratio of 18.4% on Sept. 30, 2025, and an average S&P Global Ratings-calculated risk-adjusted capital ratio of 13.1% at year-end 2024.

However, the contribution of hybrid instruments to banks’ overall capital mix has increased to 19% of their reported common equity on average. Alinma Bank and Saudi Investment Bank contributed the most as of Sept. 30, 2025, with 32% and 30%, respectively. Saudi National Bank and Arab National Bank contributed the least, with 9% and 16%, respectively, as of the same date. A significant increase in the contribution from hybrid instruments could weaken our view of banks’ capital quality. The banks will likely maintain a relatively conservative dividend payout ratio of around 50% on average, which will help their internal capital generation.

Private capital financing represents a very small proportion of Saudi Arabia's overall debt stock--2% based on S&P Global Market Intelligence data. Nevertheless, it has grown tenfold since 2020, reaching $3.7 billion in 2024. Substantial funding needs arising from Vision 2030 and growth in the small-to-midsize-enterprise sector present key opportunities for private capital financing to offer loans to the domestic market in collaboration with banks.

Banks' total direct exposure to sectors subject to the energy transition accounted for 14% of total lending at year-end 2024. Banks' indirect exposure is higher due to the still significant, but reducing, contribution that hydrocarbons make to the country’s economy and fiscal revenues. S&P expects banks to continue integrating sustainability into their lending, investment, and funding decisions.

"All our Saudi bank ratings carry stable outlooks. We also see stable trends for economic and industry risk under our Banking Industry Country Risk Assessment for Saudi Arabia," the agency said.

"We therefore expect Saudi bank ratings to remain unchanged in 2026. Geopolitical turmoil and a material and extended decline in oil prices are the main risks. At the same time, we are keeping an eye on banks' external debt accumulation and the evolution of their capital quality," it noted.