Saudi banking sector 'very strong'; current performance reflects liquidity, oil, geopolitical woes: EFG Hermes

Ahmed Shams El Din, Managing Director and Head of Global Research at EFG Hermes

Ahmed Shams El Din, Managing Director and Head of Global Research at EFG Hermes, said the Saudi market’s recent performance reflects investor concerns over liquidity, oil price volatility and regional geopolitical risks, rather than quarterly corporate results.

Speaking to Argaam on the sidelines of the 11th EFG Hermes London Investor Conference, he said Saudi Arabia was the most affected by these challenges against peers due to its size, depth and concentration of major players, adding that Q2 2025 earnings were mixed across sectors, with banks outperforming consumer-facing industries.

Valuations and Multiples

Shams El Din said the Saudi market is currently trading at a P/E ratio of 13-14x, a level not seen in years, versus 16–17x previously when the market enjoyed a valuation premium over emerging and regional peers. That premium no longer exists. The key question now, he said, is whether the market is in a temporary transition or entering a “new normal” for emerging markets, marked by liquidity pressures and reliance on external financing to meet growth targets.

Emerging Markets Performance and Saudi Arabia’s Position

Other emerging markets, particularly China, have posted strong gains since the start of the year, while the Tadawul All Share Index fell 8-9%, widening the valuation gap. Saudi Arabia, however, is at a different stage, as Vision 2030 seeks to diversify the economy beyond oil and attract more tourists — goals that rely heavily on oil revenues to secure funding.

Bank Funding and Debt Instruments

Shams El Din explained that Saudi banks have reached the limit of using deposits to fund growth, pushing them toward cross-border financing via Tier 1 and Tier 2 instruments that qualify under central bank capital requirements.

The main challenge since the start of the year has been securing enough liquidity for growth, whether from government or corporates, and if liquidity is fully absorbed by banks, questions arise on how to finance mega-projects. This pressure on liquidity has weighed on valuations in H2 2025, as markets priced in faster growth.

He noted that the Kingdom’s two largest banks have issued debt for two years to sustain funding without taking on excessive risk, in line with global capital adequacy standards. Banks are gradually shifting to long-term debt instruments as an alternative to deposits, with issuances not limited to large banks and corporates but also extending to SAR- and USD-denominated issuances, volumes of which are expected to rise.

Domestic Funding and Debt-to-GDP

He highlighted a push to expand debt instruments as an effective way to fund major projects. Saudi Arabia’s debt-to-GDP ratio remains among the lowest in emerging markets, giving both government and corporates room for safe borrowing. Private placements, currently just 5% of GDP, are expected to increase and become a key channel for attracting local and foreign liquidity, especially in the absence of currency risk.

Shams El Din stressed that the Saudi market faces no short- or medium-term currency risks, unlike many other emerging markets. P/E multiples typically reflect cost of capital, growth and potential risks, he said, and Saudi Arabia’s lower cost of capital compared with peers, alongside similar multiples, offers better medium-term growth prospects, particularly for fund investors, which could support a positive outlook.

Banking Sector Outlook

Shams El Din described Saudi banking as “very strong,” noting that the debate centers on whether liquidity is sufficient to finance the Kingdom’s ambitious growth program, not on the existence of a crisis. He added that Saudi banks’ credit ratings remain robust, with current market dynamics being part of a natural economic cycle tied to cost and growth factors rather than signs of an economic slowdown.