Saudi banks’ deposits outpace lending in 2Q

Saudi banks are paying more to hold their deposits. Deposits at the 10 largest listed Saudi banks grew faster than lending in 2Q 2026, but the growth came from costlier time deposits, a shift that Alvarez & Marsal (A&M) says could pressure funding costs and margins, according to its 2Q KSA Banking Pulse (pdf). Earnings still rose, but higher provisions and uneven margins held back growth.

Banks took in more than they lent. Deposits grew 2.7% q-o-q against 1.8% growth for net loans, easing the loan-to-deposit ratio to 103.1% from 104.1% in 1Q. Underneath, the two moved in opposite directions: deposit growth slowed from 3.9% the quarter before, while lending accelerated from 1.6%, led by a 2.3% rise in corporate and wholesale financing.

The catch is in the mix: Time deposits jumped 9.1% while cheaper CASA deposits fell 2.2%. That lifted time deposits to 45% of the total from 42.4% and nudged the sector’s cost of funds to 3.2% from 3.17%. SNB led the move, its time deposits up 20.3% q-o-q, with Al Rajhi’s up 12.8%.

SOUND SMART- CASA is the cash sitting in current and savings accounts, which pays customers little or no interest. The more of a bank's funding that comes from CASA, the cheaper its money; as customers move into time deposits, the bank pays more to fund the same lending.

Earnings grew, but margins held flat. Aggregate net income rose 3.8% to SAR 24.9 bn, and operating income increased 5.1% to SAR 42.5 bn, lifted by a 38.5% jump in other operating income. Net interest and fee income each rose 2.1%, to SAR 32.6 bn and SAR 5.2 bn. The net interest margin — the gap between what banks earn on loans and pay for funding — held broadly flat at 2.85%, even though six of the ten banks saw it narrow. Cost efficiency improved, with the cost-to-income ratio falling to 28.6% from 30.1%, and SNB recording the largest improvement.

Credit costs are the pressure point. Aggregate cost of risk more than doubled to 0.32% from 0.15% in 1Q, and net loan provisions rose 111.7% to SAR 2.6 bn. Part of the jump is a base effect at SNB, which booked large non-recurring net recoveries in 1Q. Excluding SNB, cost of risk rose to 0.37% from 0.29%.

Asset quality held up, though. Non-performing loans stayed at 0.9% of the total, provisions now cover 162.7% of them, and more than 94% of loans remained in Stage 1 — the healthy, performing bucket. A&M says much of the higher provisioning reflected write-offs of previously fully provisioned loans, suggesting portfolio clean-up rather than a broad new deterioration in credit quality.

Looking ahead

A&M Managing Director Sam Gidoomal flags three things to watch in 3Q. whether banks can protect margins as benchmark rates decline and funding costs reprice; whether corporate, SME, and Vision 2030-linked loan demand holds up; and how much precautionary provisioning they will need amid geopolitical uncertainty.

The rate call is also still far from settled. A&M expects a stable-to-lower path, but the banks are split: BSF expects no change this year, while SNB says a hike before year-end is possible.