7 Mar, 2023
Saudi banks slated to benefit from mega-projects in 2023
By Matt Smith and Francis Garrido
| The implementation of Saudi Arabia's Vision 2030 strategy is set to drive corporate loan growth in 2023. |
Saudi Arabian banks' business is expected to benefit from corporate borrowing linked to mega-projects in 2023, even as overall loan demand is set to decline.
Saudi Arabia plans to spend $1.1 trillion on mega-projects, ranging from the planned Neom smart city to a new six-runway airport in Riyadh, as part of its Vision 2030 economic diversification strategy, according to a report by real estate consultants Knight Frank.
"[In Saudi Arabia] we expect to see more borrowing on the corporate side — the corporate-focused banks have signed contracts to provide financing for the country's mega-projects," Sara Boutros, sector head for real estate and financials research at Cairo's CI Capital, told S&P Global Market Intelligence.
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The implementation of Vision 2030 projects is set to increasingly drive non-oil-sector loan growth this year as large investment projects are allocated to contractors, S&P Global Ratings wrote in a Jan. 30 report. In spite of a reduction in oil-related activity due to production cuts agreed by the OPEC group of oil-producing nations, Saudi Arabia is still likely to be the main source of economic expansion in the Gulf Cooperation Council, or GCC, region, Ratings said.
Although there is not much evidence of loans being drawn on the project-linked contracts, banks think it will happen, but with a bit of a lag, Boutros said.
Loan growth at Saudi's biggest lenders — The Saudi National Bank, Al Rajhi Banking & Investment Corp., Riyad Bank and The Saudi British Bank — has outstripped that at most other large GCC banks over the past two years, Market Intelligence data shows.
Saudi banks delivered 72% of GCC banks' incremental loan growth in 2022, with the UAE contributing 27% and Kuwait 8%, according to Ratings data. Lending in Qatar and Bahrain contracted slightly.
"From a loan growth perspective, Saudi [banks] will likely be the Gulf's strongest market this year," Shabbir Malik, a bank analyst at EFG Hermes in Dubai, told Market Intelligence.
Despite this strength relative to nearby markets, loan growth is set to slow to between 10% and 12% in 2023 and 2024, according to Ratings, due to a high base effect, higher interest rates and tighter liquidity. This slowdown, from more than 15% in 2021, is in tandem with slowing economic activity in Saudi Arabia and all other GCC countries, where gross domestic product growth is expected to decline year over year in 2023.
Aqib Elahi Mehboob, head of research at Saudi Fransi Capital in Riyadh, predicted that Saudi banks would on average achieve "high-single-digit" loan growth this year. EFG's Malik said the country's banks guided for their loan books to expand by an amount in the high single digits to mid-teens.
Liquidity, asset quality
Bank liquidity has been worsening as deposit inflows have not kept pace with recent rapid credit growth, prompting the central bank to intervene by pumping money into the financial system.
"My expectation is that should these problems arise again the central bank will step in to ensure loan growth is not restricted and financing is available for the government's economic transformation projects," Malik said.
In terms of asset quality, small and medium-sized businesses are the likeliest source of rising nonperforming loans for Saudi banks, although government entities "are essentially underwriting part of the risk," and such lending represents only a very small portion of lenders' loan books, said Mehboob.
NPLs as a percentage of total loans are projected to tick up slightly to 2% in 2023, according to Ratings. Across the GCC region's largest banks, the average problem loan ratio reached 3.29% in the final quarter of 2022, up from 3.03% in the third quarter of that year.
Saudi banks are less vulnerable to global macroeconomic factors that could impact asset quality than their neighbors in the UAE because the latter is more open and internationalized. UAE banks could see increasing NPLs in commercial real estate, consumer lending and among SMEs.
There is little expectation that Saudi banks' credit quality will deteriorate materially, EFG Hermes' Malik said.
"Banks are guiding toward broadly stable and even lower provisioning this year," he said.