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Saudi Arabia’s banking sector positive outlook will continue: Moody’s

Moody's stated that there will still be risk associated with the Kingdom's financial institutions' heavy reliance on government deposits and increased market funding as a result of strong credit growth

Moody’s Investors Service continues to view Saudi Arabia’s banking industry favourably due to the Kingdom’s initiatives for economic diversification under the “Vision 2030” agenda.

The United States-based credit rating agency stated in its most recent report that Saudi Arabian banks will see strong profit margins and improved loan performance as a result of increased demand for credit for government-backed projects.

“The banks’ operating environment will continue to be supported by the strong momentum in the non-oil sector, which will benefit from the accelerated implementation of the economic diversification agenda,” Moody’s said, as reported by the Arab News.

The report also remarked that while loan growth and lower funding costs could mitigate the effects of lower rates, an anticipated interest rate cycle reversal could put pressure on margins.

However, Moody’s stated that there will still be risk associated with the Kingdom’s financial institutions’ heavy reliance on government deposits and increased market funding as a result of strong credit growth.

“Our positive outlook also captures the government’s strengthening capacity to support banks. Heightened geopolitical tensions or much lower oil prices remain risks,” it added.

Giga-Projects To Drive Corporate Credits For Banks

As per Moody’s analysis, the Public Investment Fund-supported mega projects in Saudi Arabia will propel the expansion of corporate credit, with residential mortgages continuing to be the primary source of credit demand from consumers.

The emergence of new industries in the Kingdom, such as the entertainment and nonreligious tourism sectors, could also contribute to the banks’ positive performance in Saudi Arabia.

“Faster implementation of Saudi Arabia’s Vision 2030 economic diversification projects is the top priority for government expenditure in 2024, which is likely to exceed 2023 budgeted expenditure by 13% and will likely remain high over the next few years. The strong momentum in the non-oil sectors is set to continue in 2024 and we expect growth to exceed 5%,” the credit rating agency said.

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