Saudi Arabia's banking sector can expect continued positive performance, according to a recent report by Moody's Investors Service. The credit rating agency attributed this outlook to the kingdom's ongoing economic diversification efforts and a projected rise in non-oil sector activity.
The report highlights the positive impact of government-backed projects on loan demand. These projects are expected to boost bank profitability through improved loan performance. Additionally, the strong momentum in the non-oil sector, driven by Saudi Arabia's economic diversification agenda, is seen as a significant contributor to a healthy operating environment for banks.
Moody's analysis indicates that net income for Saudi banks is likely to stabilize at 1.7% of tangible banking assets in 2024. This follows a recovery from a pandemic-induced low of 1.4% in 2020, with net income reaching 1.9% as of September 2023. The growth is attributed to rising interest rates and an increase in loan portfolios.
The report acknowledges that while expanding loan portfolios will continue to bolster bank profits, rising interest rates might put pressure on profit margins in the long run, particularly as the interest rate cycle starts to reverse.
Despite this potential challenge, Moody's emphasizes the resilience of Saudi banks. The report underscores the sector's substantial capacity to absorb losses, with capital ratios ranking among the highest in the Middle East region. This financial strength positions Saudi banks well to navigate potential economic headwinds.
Analysts at Moody's acknowledge the crucial role that continued economic diversification will play in sustaining the positive outlook for the banking sector. The success of government initiatives aimed at reducing reliance on oil revenue will be a key factor in ensuring long-term growth for Saudi banks.
The report's findings offer encouraging news for investors in the Saudi banking sector. The positive outlook reflects confidence in the sector's ability to capitalize on the kingdom's economic transformation and generate strong returns. However, it also highlights the importance of monitoring potential challenges, such as rising interest rates and their impact on profit margins.