Saudi banks are under pressure as Iran conflict threatens liquidity, asset quality -Fitch

Saudi Arabia’s banking sector could face mounting pressures if the ongoing Iran conflict keeps going or escalates further, according to a Fitch Ratings note seen by EnterpriseAM. Banks are currently supported by solid financial buffers, but Fitch warns that a deterioration beyond its base case could lead to downgrades in some lenders’ Viability Ratings.

Under a prolonged conflict scenario marked by weaker growth and softer business activity, Saudi banks would likely see slower credit growth, declining non-interest income, and margin compression from a higher-for-longer interest rate environment. Fitch noted that an “adverse escalation” could significantly weaken financing growth, asset quality, profitability, capitalization, and liquidity buffers, while rising funding costs and intensifying competition for liquidity would further strain the system.

In a severe stress scenario — where impaired loans triple or quadruple — Fitch said most banks would likely remain close to break-even, though weaker players like Gulf International Bank Saudi Arabia and Bank Aljazira could slip into losses. Despite these risks, the sector entered the crisis from a position of strength, with Stage 3 loans at just 1.3% by end-2025 and cost of risk among the lowest in the GCC at 30 bps.

Liquidity pressures remain a key structural vulnerability, as credit growth continues to outpace deposits. The sector’s loan-to-deposit ratio reached a record 108% by late 2025, while external liabilities rose to SAR 650 bn. Fitch estimates banks could absorb a 10% deposit outflow without official support, though liquidity buffers at lenders such as Al Rajhi, Riyad Bank, and Bank Albilad would come under significant strain.

The Saudi Central Bank retains sufficient capacity to support the system through repo facilities or direct deposits, Fitch noted. Government-related entities also hold around SAR 450 bn at the central bank that could be deployed into the banking system if required.

BUT- Fitch cautioned that given the strong link between sovereign and bank credit profiles, any downgrade of the sovereign would likely translate into lower long-term issuer default ratings across the sector.