Saudi banks face years of pricier funding as lending outpaces deposits, Fitch warns

The era of cheap, abundant funding for Saudi banks is coming to a close. The latest money-supply trend “points to adequate but less abundant banking-sector liquidity,” Anton Lopatin, senior director for banks at Fitch Ratings, tells EnterpriseAM, and the competition to hold onto it is intensifying as lending keeps outrunning deposits. There is no liquidity crunch, he clarifies, but over the next several years funding costs look set to stay high and margins to come under pressure, unevenly, with the fastest-growing banks that have the thinnest cheap-deposit bases hit hardest.

Lending is outpacing deposits, and the gap is widening. Bank credit reached SAR 3.5 tn in September, up 7% y-o-y, while deposits and broad money each grew about 5%, with M3 growth slowing from 8% in June, says Lopatin. That lifted the sector’s non-regulatory loan-to-deposit ratio to around 114%, from 111%. Money supply is still expanding, but lending has again run ahead of deposits, adding to funding pressure, he says.

What is growing is the expensive kind of deposit. Time and savings deposits jumped 23% y-o-y as customers moved into higher-yielding products, while cheaper demand deposits fell 5% and dropped to 46% of total deposits, from 50% a year earlier. That props up headline M3, Lopatin said, but “it does not represent equally cheap liquidity for banks because customers are moving funds into higher-yielding products.”

Lopatin still calls the funding profile broadly sustainable, underpinned by large domestic deposit franchises, access to government and government-related deposits, strong capital, and sound regulatory liquidity metrics. The question is whether that holds over several years. If credit keeps growing persistently faster than deposits and M3, banks will have to lean harder on market funding or slow their asset growth, a shift that Lopatin says would probably raise funding costs and could narrow margins.

“Deposit competition is likely to remain the most immediate pressure,” he says. Slower deposit growth and strong loan demand push banks to pay more to keep and attract funds, and the contest is sharpest around government and government-related deposits, which “can be sizable but concentrated and relatively price-sensitive.” The drift out of non-remunerated current accounts into term deposits “improves deposit stability in some respects,” since those carry defined maturities, but it raises average funding costs and can put pressure on net financing margins.

Reliance on wholesale funding is likely to grow. Banks have already tapped international bonds and sukuk, syndicated loans, and other instruments to diversify, and Fitch expects that to increase if domestic deposits keep lagging credit. “This is not inherently negative,” Lopatin says, “longer-term market funding can improve asset-liability matching and reduce dependence on short-term deposits. However, it increases exposure to international interest rates, investor sentiment, refinancing conditions and geopolitical volatility,” with the risk weighted toward fast-growing banks that have smaller deposit franchises and weaker access to low-cost accounts.

Funding costs look set to stay elevated even if policy rates fall. Deposit pricing is slow to follow lending yields down, Lopatin said, so margins could compress most at banks with price-sensitive corporate or institutional deposits, weak current- and savings-account franchises, rapid loan growth, heavy wholesale reliance, or large fixed-rate, long-duration books. And the demand driving the squeeze is not easing: public-sector enterprise lending rose 21.5% y-o-y to SAR 285.1 bn in September, roughly three times total credit growth, as Vision 2030 spending keeps balance sheets stretched.