S&P Global spotlights roots of Saudi banks’ increased AT1 sukuk issuances

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Lending growth in Saudi banks has outpaced that of deposits over the past few years, underpinning the growing trend towards tapping alternative funding sources, S&P Global Ratings said in its latest report.

Saudi Vision 2030, according to the rating agency, is bound to continue to drive growth in both corporate and retail lending for banks, “which may, in turn, face constraints from the perspective of funding and capitalization.”

While Saudi banks maintain robust capitalization (with a total capital adequacy ratio of 19.3% as of June 30, 2025), they are still “proactively” issuing Shariah-compliant hybrid instruments such as additional tier 1 (AT1) to reinforce their funding and capital positions, it further stated.

How much AT1 sukuk have Saudi banks issued so far this year and why?

As of Aug. 27, 2025, Saudi banks issued $9.5 billion worth of sukuk, versus $5.3 billion over the same period in 2024. AT1 sukuk issuances made up $4.2 billion of that total — more than double the $2 billion in 2024, according to S&P Global.

These issuances are being used to raise external funding needed to strengthen their loan books while also supporting regulatory capital ratios, it added.

“[AT1 instruments] are also competitively priced when compared with senior unsecured sukuk. On average, Saudi banks paid 6.4% on their USD-denominated AT1 issuances compared with 5% on USD-denominated senior sukuk,” read the report.

Why are AT1 instruments being issued in foreign currency?

Four out of five of the AT1 issuances carried out so far this year were USD-denominated and only one was in Saudi riyal, which allows banks to attract funding from a broader investor base, S&P explained.

It also highlighted that issuances in USD were not that differently priced from the SAR-priced transaction. Given that the Saudi currency is pegged to the US dollar, USD-denominated issuances will unlikely grant an additional edge as in other emerging markets.

“We project the Federal Reserve will cut its rates by 50 basis points later this year and believe that this will be mirrored by the Saudi Central Bank. This will likely reduce banks’ cost of funding, including on hybrid instruments,” said the ratings agency.

What impact will these issuances have on Saudi banks’ capital quality?

Capital buffers remain strong. Saudi banks boasted a total capital adequacy ratio of 19.3% as of June 30, 2025, and an average risk adjusted capital (RAC) ratio of 13.1% at the end of 2024 for rated banks.

It wrote, “The amount that AT1 instruments contribute to the overall capital structure of banks has increased over the past few years and reached 22% of reported common equity on average on June 30, 2025, and 17.9% of adjusted common equity for rated banks.”

Meanwhile, it pointed out that a significantly higher ratio could weaken its view of banks’ capital quality.

According to the report, “Positively, Saudi banks are solidly profitable with return on assets reaching 2.3% on June 30, 2025. We expect this ratio to remain broadly stable in the next 12-24 months since the expected decline in interest rates will be compensated by higher lending volumes.”

S&P Global forecasts Saudi banks’ dividend policies to remain relatively prudent, with a distribution rate close to 50%. This should in turn support banks’ capitalization both quantitatively and qualitatively, it underlined.

What is behind the wider external debt in the Saudi banking system?

Despite a significant increase in external funding over the past three years, the overall contribution of net external debt to Saudi banks' funding remains limited.

By the end of 2024, banks had transitioned from their earlier net external asset position to a smaller net external debt position of SAR 34 billion ($9 billion). This position advanced to SAR 123 billion ($32.8 billion) as of June 30, 2025. However, this position is “still very manageable”, accounting for 3.9% of total lending by June 30, 2025, said S&P Global.

“While we expect the volume of Saudi banks’ external debt to continue to increase in the next 12-24 months, we do not think it will exceed 10% of total lending. We note that 52% of Saudi banks’ external debt is due to foreign banks, which generally tend to be shorter term and are potentially more volatile than capital market issuance, particularly during spikes in geopolitical risk,” read the report.

“However, we understand that some of these are repurchase agreement transactions, which tend to be more stable than unsecured transactions. We view Saudi authorities as highly supportive of the banking system,” it added.