It’s steady growth ahead for Saudi’s banking sector: The local banking sector is looking at a stable year on the back of strong corporate lending, mortgage demand, and funding needs for diversification push, despite lower interest rates, according to S&P Global’s Saudi Arabia Banking Sector Outlook 2025 (pdf).

Deep dive: Local banks are expected to see stable earnings this year, as higher volumes make up for narrower interest rate margins. Return on assets is estimated at 2.1%-2.2% for the year, while net interest margins are expected to narrow by 20-30 bps due to Saudi Central Bank’s (Sama) Fed-aligned rate cuts. Strong credit growth is expected to offset this decline.

Floating-rate corporate loans (50% of total loans) are expected to reprice quickly and rake in lower interest rate income, while fixed-rate long-term mortgages (25% of loans) will provide income stability. While lower interest rates will also decrease funding costs, further drops in rates may lead consumers to demand deposits, affecting bank funding portfolios.

Our banks are also well-capitalized: The banking sector reported a 19.2% capital adequacy ratio in late September, well ahead of the minimum 10.5% requirement. Dividend payout ratios are expected to average 50%, supported by strong earnings.

Diversification to fuel credit growth: Corporate lending will underpin a forecasted 10% credit growth, as companies look to bankroll diversification projects. Meanwhile, lower interest rates are expected to boost mortgage lending, while expanding mortgage portfolios will also be supported by growing demographics and a rising demand for residential real estate.

Non-performing loans are expected to inch up to 1.7% of total loans this year, up from 1.3% in September 2024, due to limited loan write-offs. The accumulation of NPLs is expected to remain slow due to low interest rates. Credit losses are expected to be capped at 50-60 bps through the coming two years due to strong loan provisions.

Private sector leveraging is set to increase due to lower interest rates, but will remain below 150% of GDP in the medium term, the report said.

On the flipside: The uptick in lending has outpaced deposit, straining liquidity. Saudi banks are turning to external funding to support diversification initiatives, with local banks transitioning to net external debt in 2H 2024. Liquidity is set be bolstered by initiatives such as Saudi Real Estate Refinance (SRC), Hassana’s mortgage-backed securities, and SRC’s BlackRock partnership that look to unlock foreign and local capital. The central bank could also intervene to mitigate any further strains.

Fiscal risks from rising debt are set to be softened by the recalibration ofgigaprojects, with the government expected to maintain a net asset position above 40% of GDP through 2027.

REMEMBER- Deficits aren’t all bad: Deficits of SAR 100-140 bn can be beneficial, Finance Minister Mohammed Al Jadaan told Al Arabiya late last year, as long as the returns on public spending exceed the cost of borrowing. The Kingdom looks to benefit from the interest rate reversal to increase borrowing, signalling fiscal expansion in 2025, 2026, and 2027.

A snapshot of bank ratings: Al Rajhi, Saudi National Bank, Riyad Bank, are all rated A-/Positive/A-2. Banque Saudi Fransi and Arab National Bank had same ratings but with stable outlooks, while Alinma Bank and Saudi Investment Bank were rated A-/Stable/– and BBB/Positive/A-2, respectively.

THE MACRO LENS-

S&P Global forecasts 4.0% GDP growth for Saudi Arabia between 2025-2027, up from 0.8% in 2024, on the back of non-oil sector growth. The state’s diversification agenda is set to be a key driver for non-oil economic growth in the medium run, leading to upswings in construction and services, with tourism also showing strong growth potential due to easier visitor access and increased options.

REMEMBER- The IMF revised down its projections for the Kingdom’s economy earlier this month, to 3.2% in 2025 and 4.1% in 2026. The World Bank was more optimistic, forecasting 3.4% growth for 2025 and 5.4% growth in 2026, while Al Rajhi Capital expects GDP growth to come in at 4.6% this year and 4.3% in 2026.

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