https://arab.news/gbqac
- Rating agency said development of planned mega projects in Saudi Arabia will play important role in generating huge business and lending opportunities for banks
- Kingdom’s housing program has been a driver of credit growth for the banks over the last five years
RIYADH: Saudi Arabia’s Vision 2030 program to diversify the economy could accelerate the country’s banking sector development in the coming years, according to an analysis by Moody’s.
In its latest report, the US-based credit rating agency said the development of planned mega projects in Saudi Arabia will play an important role in generating huge business and lending opportunities for banks. The infrastructure required to host major events like the Asia Cup in 2027, the Asian Winter Games in 2029, Expo 2030, and the FIFA World Cup in 2034 is expected to support this growth further.
Vision 2030 aims to reduce the Kingdom’s decades-long dependence on crude revenues and steadily bolster its presence in other sectors like tourism, technology, and real estate.
“Planned mega projects to diversify the economy include the tourism, real estate, and infrastructure sectors, and the government provides the country’s banks the opportunity to help fund them,” said Abdulla Al-Hammadi, assistant vice president and analyst at Moody’s Ratings. “One part of Saudi Vision 2030 is a plan to raise home ownership to 70 percent by 2030 from 47 percent in 2016.”
The report said the Kingdom’s housing program has been a driver of credit growth for the banks over the last five years, with household mortgages reaching SR607 billion ($161.67 billion) at the end of 2023, up from SR110 billion in 2016. They now comprise around 24 percent of total banking sector loans.
“Given these mortgages were secured at a fixed rate during a time of low interest rates and that tenures are often for 25 to 30 years, this could place some pressure on margins in the sector. We believe that larger banks will be hit hardest due to their dominant position in the Saudi mortgage market,” said Al-Hammadi.
If deposit development continues to lag loan growth, banks could also face growing funding shortages. Given the nature of mortgage fixed-rate loans, it may be challenging for financial institutions to offload them in the still-developing secondary markets.
The agency said Saudi banks could also face challenges in this run, which include insufficient deposit growth to meet the growing credit demand associated with Vision 2030 infrastructure and development projects.
“A challenge is that availability of deposit growth is lagging behind accelerated credit growth at Saudi banks, while the home-ownership push has packed the banks with long-term, fixed-rate mortgages that tie up funds.
“The banks will need to tap more confidence-sensitive market funding. This could entail foreign deposits, interbank syndications, and debt issuance, particularly Islamic bonds or sukuk,” said Al-Hammadi.
According to the report, reliance on short-term foreign funding will be riskier than long-term, such as senior unsecured debt and additional tier one, since long-term allocations will better match these banks’ long-term loans.