Nuanced loan-to-deposit ratios
Diversified liquidity and funding mix
Sound Saudi banking metrics
The loan books of Saudi Arabian banks now exceed their total deposits, which might normally be a warning sign that the sector’s finances are under strain.
Yet the Saudi Central Bank (Sama) takes a more nuanced approach to calculating loan-to-deposit ratios, an important metric known in the industry as LDR. Sama’s assessment indicates that lenders can again allow loan growth to exceed deposit expansion this year.
Banks’ core business involves re-lending customers’ deposits to borrowers. The Saudi Arabian banking sector’s loan-to-deposit ratio soared to 105 percent last year, up from 99 percent the year before, according to a report by consultants Alvarez & Marshal published this week.
Such a figure comes from calculating loans as a percentage of deposits.
“There was a sharp liquidity squeeze in the fourth quarter wherein the cost of funding rose substantially for some banks,” says Aqib Elahi Mehboob, head of sell-side research at BSF Capital in Riyadh.
Yet Sama uses a different methodology to determine banks’ loan-to-deposit ratios, weighting current account deposits differently to term deposits, for example.
Term deposits refer to accounts where customers earn a higher interest rate in return for not withdrawing money for a fixed period.
Similarly, long-term secured lending – such as mortgages – are weighted more favourably from a bank’s perspective than shorter-term consumer loans.
In contrast to Alvarez & Marshal, Sama’s latest report says the banking sector’s loan-to-deposit ratio was 83 percent in December.
“Banks are being opportunistic on the term deposit side because of the advantages that these have for LDR calculations and for asset liability matching,” says Mehboob.
Pursuit of term deposits has pressured banks’ net interest margins, which fell slightly to 3.1 percent in 2024, and raised cost of funds to 3.5 percent – up 0.6 of a percentage point versus a year earlier, Alvarez & Marshal estimates.
The sector achieved loan growth of 14.4 percent in 2024, up from 10.6 percent in 2023.
Saudi commercial banks hit record profits in 2024
Saudi Arabia’s biggest bank wants wealthy depositors back
Share price rally tipped to keep rolling for UAE banks
In contrast, deposits rose by only 7.9 percent last year, a smaller expansion than the 8.4 percent recorded in 2023, the Alvarez & Marsal report states.
Increasingly, banks – including smaller lenders – have tapped international markets to raise additional tier (AT1) bonds to strengthen their capital reserves. These bonds can be written off or converted into equity should a bank face financial difficulties.
“Banks have diversified their liquidity and funding mix,” says Mehboob. “The overall metrics of the Saudi banking sector show it’s very sound on a global level.”
Balance sheets are relatively conservative and there is wriggle room for them to expand lending, he says.
“There seems to be an effort to try and keep it that way to prevent the investment cycle going wild,” Mehboob says.
