Saudi Arabia’s banking sector has shown resilience in 2024, bolstered by strong asset quality, improved cost efficiency, and disciplined credit management, according to a report by Alvarez & Marsal (A&M). Despite rising funding costs and intensified competition for deposits, the sector has maintained profitability and continues to support the country’s Vision 2030 economic transformation.
Profitability Despite Funding Challenges
A&M’s KSA Banking Pulse 2024 report reveals that Saudi banks have navigated rising costs through strategic financial management. While lower interest rates have had mixed effects on earnings, strong credit quality and cost optimization have helped sustain profitability.
According to Fitch Ratings, the impact of interest rate cuts has been limited due to ongoing liquidity constraints and fierce competition for deposits. Although lower rates boost loan growth, banks are being forced to reduce lending rates while offering attractive deposit rates to retain liquidity.
Strong Asset Quality and Risk Management
Saudi banks have demonstrated robust asset quality, with the non-performing loan (NPL) ratio improving by 18 basis points to 1.1 percent. Loan loss coverage remained solid at 161 percent, creating a strong buffer against defaults. The cost of risk also declined to 0.3 percent, reflecting better risk management and healthier loan portfolios.
These improvements have positively impacted bank earnings, allowing institutions to retain more profits rather than setting aside provisions for bad loans. With a larger share of performing loans, banks have been able to maintain stable returns despite margin pressures.
Growth in Capital Markets and Corporate Lending
Saudi banks continue to play a critical role in capital markets, with banking stocks driving market turnover on the Saudi Stock Exchange. The sector has also expanded into debt markets, with increased sukuk issuances funding large-scale projects.
Corporate lending remains a key growth driver, with loan expansion reaching 14.4 percent year-on-year in 2024. This growth, fueled by Vision 2030 mega-projects and infrastructure development, has led banks to diversify funding sources, relying more on sukuk issuances, external borrowing, and interbank lending.
Efficiency and Profitability Gains
A&M’s report highlights strong cost management efforts, which have improved the sector’s cost-to-income ratio by 63 basis points to 31.3 percent. Banks have optimized operational expenses while maintaining revenue growth, contributing to a 9.3 percent year-on-year increase in operating income and a 13.5 percent rise in aggregate net income to SR79.6 billion.
Despite these gains, net interest income growth slowed to 7.6 percent in 2024, down from 11 percent in 2023, due to rising funding costs. However, banks have offset margin pressures through higher fee-based income and cost efficiencies, ensuring continued profitability.
Funding Pressures and Monetary Policy Impact
The rise in funding costs stems from both local liquidity constraints and global financial trends. Deposit growth has lagged behind lending expansion, pushing the loan-to-deposit ratio to 104.7 percent, surpassing the 100 percent mark for the first time in years.
Government-related entity (GRE) deposits, which account for one-third of total sector deposits, have also fluctuated. While deposits initially declined by SR27 billion in late 2024 due to seasonal outflows, they rebounded by SR40 billion in January 2025.
The US Federal Reserve’s 100 basis point rate cut in 2024 prompted the Saudi Central Bank (SAMA) to lower its repo rate to 5 percent, in line with the riyal’s dollar peg. However, funding costs remain elevated as banks continue to carry high-cost deposits and debt issued during the peak rate period.
Outlook for 2025
With loan growth projected to outpace deposits, Fitch Ratings expects banks to increase non-deposit funding, with debt issuance exceeding $20 billion. While competition for liquidity may offset the benefits of lower interest rates, banks are likely to focus on optimizing funding strategies and leveraging long-term debt instruments to sustain growth.
Despite these challenges, Saudi banks remain well-positioned to navigate tightening liquidity conditions while maintaining profitability, reinforcing their role as key enablers of the Kingdom’s economic diversification efforts.
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