Saudi banks have witnessed a remarkable shift in the first quarter of 2024, characterized by an increase in deposits surpassing loans, contrary to the trend observed in previous years. Deposits reached an all-time high of 2.6 trillion riyals by the end of Q1, marking a 4.8% quarterly increase and an 8% annual growth rate.

Conversely, loans grew by 3.3% on a quarterly basis, reaching 2.67 trillion riyals, with an annual growth rate of 8.9%. In absolute terms, loans increased by approximately 84.3 billion riyals, while deposits increased by 123 billion riyals. This has somewhat narrowed the gap between loan growth and deposit growth, thereby easing liquidity pressures to some extent.

This development is significant because, in the past, loan growth outpaced deposit growth, putting pressure on the sector’s liquidity. The loans-to-deposits ratio, according to the Saudi Central Bank’s standards, has dropped to its lowest level since 2020, though this regulatory ratio considers other items in the funding base and weighs them according to a maturity schedule.

S&P Global Ratings reported that deposits in Saudi banks rose above 100% in 2022 from 86% in 2019. In a direct calculation of loan and deposit volumes, S&P noted in a report released yesterday that the loans-to-deposits ratio increased to over 100% in 2022, up from 86% in 2019.

### Increase in Mortgage Loans

The agency also reported that the share of mortgage loans increased from 12.8% in 2019 to 23.5% in 2023. The primary reason for this trend is the significant expansion of the mortgage loan market, with its share rising to 23.5% of total bank lending by the end of 2023, up from 12.8% at the end of 2019.

S&P stated that Saudi banks will resort to three options to expand their funding base. Despite strong deposit growth in Q1, S&P expects loan growth to continue outpacing deposit growth in the coming years, compelling banks to turn to alternative sources to expand their funding base and continue lending.

### Options for Expanding the Funding Base

Banks have several options for expanding their funding base. The first option is to liquidate part of their investment portfolios, which constituted 15.7% of banks’ assets at the end of 2023. However, the downside of this option is that it would convert some unrealized losses in balance sheets into realized losses.

Another option is to utilize revaluation reserves, which amounted to -7.4 billion riyals at the end of 2023. S&P highlights that the total revaluation reserves stood at a negative 7.4 billion riyals by the end of 2023.

### Mortgage-Backed Sukuk

Mortgage-backed sukuk represent another option for expanding the funding base. This type of bond is a primary tool for banks in the US market, comprising the second-largest bond market after Treasury bonds, accounting for about 26% of the market. The Saudi Real Estate Refinance Company (SRC) has purchased around 5% of banks’ mortgage loans.

Although this type of sukuk or bond was non-existent in Saudi Arabia, SRC was established in 2017 to purchase mortgage loan portfolios from banks and issue sukuk for refinancing. By the end of 2023, SRC’s total portfolio amounted to 26.7 billion riyals, or about 5% of the mortgage loans provided by banks. When compared to the total loan portfolio, this figure represents less than 1%.

### Turning to Foreign Debt Markets

The third option for enhancing funding sources is to turn to foreign debt markets, a trend that has already begun and is expected to continue over the next three to five years, according to S&P forecasts.

Additionally, the net external position is expected to shift from a creditor to a debtor status in the coming years. Currently, Saudi banks have a net external creditor position of 43 billion riyals, or 1.6% of the lending portfolio. However, this position is expected to turn into a net debtor status within a few years, according to S&P.