RIYADH: Saudi banks recorded a net income of SR21.5 billion ($5.7 billion) in the fourth quarter of 2024, up from SR20 billion in the previous three-month period, according to Fitch Ratings.

The improvement was primarily driven by interest rate cuts, which enhanced net margins, alongside strong lending growth expected to outpace Gulf peers in 2025.

Fitch Ratings’ outlook aligns with S&P Global’s January projection that banks in the Kingdom will sustain stable profitability in 2025 as higher lending volumes offset lower margins while continuing to tap international capital markets for growth related to the country’s Vision 2030.

The agency estimated the average net interest margin for Saudi banks increased to 3.2 percent in the last quarter of 2024 from 3.1 percent in the first nine months of the year. 

The improvement followed a 12-basis-point reduction in banks’ cost of funding to 3.2 percent after the central bank lowered interest rates by 50 basis points. Meanwhile, the yield on average earning assets remained stable at 6.3 percent.

“Banks with higher levels of retail financing benefited most,” Fitch said.

Al-Rajhi Bank and Bank Aljazira posted quarter-on-quarter NIM increases of 20 basis points to 3.4 percent and 2.3 percent, respectively.

Saudi National Bank’s NIM also improved, rising to 3 percent in the fourth quarter from 2.7 percent in the previous one.

Strong annual performance

Banks in the Kingdom reported a combined net profit of SR80 billion in 2024, up from SR70 billion in 2023, with the sector’s average return on equity climbing to 15 percent from 14 percent. 

The rise in earnings was supported by robust growth and a lower cost of risk, which dropped to 30 basis points from 40 basis points a year earlier, reflecting a healthy operating environment.

Lending activity remained strong, expanding by SR87 billion in the last quarter of 2024. Al-Rajhi Bank led the growth with an increase of SR44 billion, evenly split between its retail and corporate segments. 

Annually, gross financing at Saudi banks grew by an average of 14 percent, up from 11 percent in 2023. 

Saudi Awwal Bank, the Saudi Investment Bank, and Bank Aljazira recorded above-average growth. 

Fitch forecasted financial institutes in the Kingdom to “continue outpacing Gulf peers in 2025,” with sector financing projected to rise by 12 percent, supported by further rate cuts and improved liquidity.

Deposit trends and liquidity management

Customer deposits at Saudi banks declined by SR35 billion in the last quarter — the first quarterly drop since 2019. 

Fitch attributed this to seasonal factors and expects deposits to rebound in the first three months of this year, as in previous years. In January, deposits increased by SR40 billion, according to data from the Saudi Central Bank.

SNB experienced the largest deposit outflow in the fourth quarter, with its balance declining by SR54 billion, including an SR30 billion drop in current and savings deposits. 

They accounted for 72 percent of SNB’s total deposit base. To offset the decline, the bank utilized repo facilities and money market deposits, leading to an increase in its Fitch-calculated loans-to-deposits ratio to 115 percent by year-end, compared to a sector average of 105 percent. The bank’s regulatory loans-to-deposits ratio remained at 84 percent.

Stable external liabilities and asset quality

Saudi banks’ external liabilities remained steady at around SR0.4 trillion at the end of the fourth quarter, representing 11 percent of total sector funding. 

“We expect Saudi banks to gradually increase their reliance on external funding, especially if corporate borrowers continue to demand foreign-currency financing, but net foreign assets will remain below 2 percent in 2025,” the agency said.

The sector’s impaired financing balance decreased by SR2 billion in the last three months of 2024, contributing to a decline in the impaired financing ratio to 1.4 percent from 1.7 percent at the end of 2023. 

Provision coverage of impaired financing remained strong at 114 percent by year-end, and Fitch expected Saudi banks’ asset quality metrics to remain robust in 2025.

Capital adequacy and sector outlook

The sector’s Common Equity Tier 1 ratio decreased by 80 basis points to 15.7 percent in 2024 due to growth and dividend distributions. 

However, the Tier 1 and total capital adequacy ratio declines were more moderate, at 30-40 basis points, as banks issued Additional Tier 1 and subordinated debt.