S&P Global provides its two cents on Saudi banks’ external debt

Saudi banks have been racking up their external funding over the past three years as local financing sources proved to be insufficient to cover domestic demand; however, S&P Global Ratings doesn’t expect the rising external debt to “translate into significant vulnerabilities for Saudi banks,” the credit rating agency wrote in a recent report seen by EnterpriseAM.

Funding from local sources is no longer enough to meet the Kingdom’s ambitious plans as set out in the state’s Vision 2030 program, with Saudi banks having increasingly tapped international capital markets for funding. Banks’ net external asset position slipped down to a smaller surplus of SAR 34 bn by the end of 2024, S&P wrote, adding that it expects foreign liabilities to almost double by 2028. However, the agency predicts the Kingdom’s banks’ net external debt position to remain at around 4.1% of total lending by that point, which it says is a “manageable level.”

Interbank liabilities were the main contributor behind banks’ debt in 2024, accounting for 55% of the overall increase in the external gross debt last year. The remainder primarily came from issuances in international capital markets, either directly or through Saudi banks' branches operating in global liquidity centers.

Meanwhile, 59% of Saudi banks’ external debt was owed to foreign banks by the end of last year, which could pose a potential risk as these funding sources “tend to be generally shorter-term and potentially more volatile than capital market issuance.” In addition, the ratio of Saudi banks’ foreign assets to their foreign liabilities fell to 54% in 2024 from 109% in 2022 — which could, in turn, expose Saudi banks to outflows driven by foreign investors’ appetites.

BUT- S&P doesn’t see this as a major concern, citing that nearly half of the deposits come from GCC countries, where banks have plenty of liquidity.

More is being done to meet the financing needs for Vision 2030 goals: Banks have turned to mortgages as a means of creating financing headroom for the Kingdom’s Vision 2030 ambitions, with lenders shifting some assets off their balance sheets either by divest mortgages to the Saudi Real Estate Refinance Company or by using securitization to move them off their balance sheets. Mortgages made up some 23% of all loans as of 2024, according to S&P.

That’s not all that’s being done, however: The Kingdom’s banks, led by the Saudi National Bank, have reportedly been looking to begin selling non-performing loans (NPLs) through a number of securitization agreements, with the move aiming to free up room for financing the Kingdom’s gigaprojects.