Fitch sees limited improvement in Saudi banks' performance as interest rates fall

Fitch Ratings said that Saudi banks' performance metrics, especially net interest margins, are expected to see limited improvement as a result of the interest rate cuts that began during 2024.

This is due to prolonged tightening of liquidity conditions and strong competition for funding, the ratings agency said in a report. It noted a sharp drop in oil prices could further tighten liquidity, but the Saudi Central Bank (SAMA) may intervene if liquidity shortages restrict banks’ ability to meet demand for financing.

The sector's average net interest margins improved by 10 bps to 3.2% in Q4 2024 from 3.1% in the first nine months of 2024, helped by rate cuts in the period from September to November, with the repo rate falling to 5% from 6%, according to the report.

Fitch also expects lending to grow by 12%-14% in 2025, driven by the corporate segment, with lending growth likely to continue to exceed deposit growth, as banks increasingly rely on non-deposit funding.

Bank's debt issuances are expected to exceed $20 billion in 2025. The Fitch-calculated loans/deposits ratio (LDR) increased to 106% at the end of 2024 from 93% at 2021-end, while the sector deposit funding gap was about SAR 0.3 trillion. "We expect the LDR and the funding gap to increase further in 2025," said the agency.