The Banker: Saudi banks strengthen their presence amid shift in mega-project financing

The Banker, a financial magazine published by the Financial Times, noted that Saudi banks have strengthened their presence amid shifts in mega-project financing, considering that cost-cutting measures taken by the authorities are providing more opportunities for banks amid growing concerns about oil prices.

The magazine noted that Saudi Arabia faces the possibility of increased financial tightening amid lower oil prices, but its lenders have many reasons for optimism.

The article warned that the local banking sector could be one of the most prominent beneficiaries of the significant spending cuts imposed this year by the Public Investment Fund (PIF)—the sovereign wealth fund at the heart of the country’s Vision 2030 social and economic transformation program—on more than 100 of its companies, with lenders already increasing their financing for major projects, according to the article. While analysts expect corporate lending to be the main driver of credit growth for the third consecutive year, the country’s mortgage market is expected to see stronger growth in 2025 with lower interest rates.

However, any profitability gains are likely to remain modest for lenders, given increasingly deteriorating liquidity conditions. While the effects of the sharp decline in oil prices are yet to be determined, analysts warn that continued low prices could begin to undermine credit demand in the corporate sector and strain the external funding environment banks need to sustain credit growth.

According to data compiled by global professional services firm Alvarez & Marsal, the combined net income of the 10 largest banks in Saudi Arabia is expected to rise by 13.5% in 2024, compared to an increase of 11.8% in 2023.

This increase was boosted by a 7.5% decline in impairment charges, which more than offset a weak operating income environment, with net interest margins declining to 3% from 4.1% previously. Return on assets stabilized at 2%, with return on equity rising 72 basis points to 14.5%.

According to A&M data, credit growth increased by 14.4% in 2024. Corporate lending was the main driver, rising by 17.7% compared to 14.4% in 2023.