Fitch expects limited improvement in Saudi banking indicators due to interest rate cuts

Fitch Ratings revealed that Saudi banking performance indicators, particularly net interest margins, are expected to see limited improvement as a result of the interest rate cuts that began in 2024.

The agency stated in a report that this is due to the continued tightening of liquidity and intense competition for funding, noting that any decline in oil prices could lead to an increase in liquidity shortages, with the possibility of intervention by the Saudi Central Bank if the liquidity shortage restricts banks’ ability to meet funding demand.

It added: “There is an improvement in the sector’s average net interest margins by 10 basis points to 3.2% in the fourth quarter of 2024, compared to 3.1% in the first nine months of 2024. This was supported by the interest rate cuts in September and November, with the repo rate declining to 5% from 6%.” Fitch indicated that lending growth will range between 12% and 14% in 2025, driven by the corporate sector. It expects lending growth to continue to outpace deposit growth, as banks increasingly rely on non-deposit financing. Fitch expects bank debt issuance to exceed $20 billion in 2025. Fitch noted that its loan-to-deposit ratio increased to 106% by the end of 2024, from 93% at the end of 2021. The funding gap reached SAR 0.3 trillion, and it expects this ratio to increase further during the current year, 2025.