Moody’s revised its outlook for Saudi Arabia’s banking sector from positive to stable due to tightening funding conditions, it said in its most recent Banking System Outlook report seen by EnterpriseAM. Customer deposits will remain the main funding source, although the share of higher-cost term deposits will increase, bringing down the overall rating.

The rationale: Reliance on confidence-sensitive capital market funding is expected to rise as credit demand outpaces deposit growth, pushing the loan-to-deposit ratio further above 100% in the next 12 to 18 months. Inflow of government deposits will help bridge the gap, while also increasing concentration risks.

Loan performance is expected to remain stable, with problem loans staying low at a 1.5% ratio. Exposure to high-risk sectors like real estate is expected to increase, but will be mitigated by strong government support, the agency said.

REMEMBER- Bank credit grew 14.4% y-o-y to SAR 3.0 tn in 4Q 2024. Personal loans continued to account for the lion’s share (46.2%), followed by corporate credit to the real estate sector, wholesale and retail trade, and electricity, gas, and water supplies.

The banking sector’s net income is projected to stabilize at 1.8%. While margins may face slight pressure from costlier funding, fee income is expected to rise in tandem with increasing loans, letters of credit and guarantee volumes.

A favorable environment: Moody’s forecasts non-oil GDP growth to remain strong at 4-5% this year, with high business confidence supporting positive operating conditions. The government’s diversification agenda and job creation will continue to drive economic expansion, boosting credit demand in the corporate sector.

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