Saudi bank VRs to face pressure from prolonged Iran conflict: Fitch

Saudi Arabian banks’ asset quality, profitability and liquidity could come under pressure if the Iran conflict is more prolonged or severe than expected, Fitch Ratings said, in a report.

This could lead to Viability Rating (VR) downgrades for some banks, although the banks currently have good buffers to weather pressures stemming from the conflict under Fitch’s current baseline assumptions, it added. According to the report, all 11 rated Saudi banks’ Issuer Default Ratings (IDRs) are driven by government support, and are therefore primarily sensitive to the sovereign’s ability to provide support.

A sovereign downgrade would most likely lead to bank Long-Term IDR downgrades. Fitch’s adverse scenario – involving a more prolonged conflict, weaker economic growth and lower business activity – would likely translate into slower credit growth and lower non-interest income for Saudi banks. Higher inflation and higher-for-longer interest rates would pressure net interest margins, with increased competition for liquidity raising the cost of funding.

Higher interest rates would also put pressure on borrowers, potentially lifting impairment charges and further hurting banks’ profitability, the report stated. Fitch estimates banks would be able to withstand short-term liquidity stress, assuming a 10% deposit outflow, without funding support from the authorities.

However, liquidity coverage of deposits at three banks (Al Rajhi Banking and Investment Corporation, Riyad Bank and Bank Albilad) would fall to or below 10% under this stress scenario. Fitch also stated that the Saudi Central Bank (SAMA) can support banking sector liquidity, if needed, through repo facilities or bank deposits, as in past crises.

Additionally, government-related entities held about SAR450 billion of deposits with the central bank at end-2025, equal to about 12% of banking sector funding and 15% of deposits. It believes these funds could be redirected by SAMA to the banking sector, mitigating potential liquidity pressure, if needed.