Saudi Banks are set to experience a substantial increase in profit margins in early 2025, fueled by anticipated interest rate cuts.
This will likely put Saudi banks in a favorable position and highlight their strengths against their Gulf counterparts, Arab News reported citing a Bloomberg Intelligence report.
Robust Financial Institutions
The Bloomberg report pointed out the strengths of the Saudi financial institutions. It noted that their reduced exposure to volatile markets has played a key role in increasing their valuations. Moreover, their conservative use of debt not only enhances their financial position, but also enables them to strategically boost their profitability as interest rates decline.
Furthermore, their proficient management of taxes strengthens their competitive edge against other Gulf nations. Additionally, Saudi Arabia is playing a pivotal role in a $2 trillion construction pipeline in the Middle East and North Africa region, accounting for 34% of the total. This indicates that the Kingdom’s banks will need to secure funding to support a wide range of ongoing projects.
Interest Rate Cuts
According to the report, the central banks of Saudi Arabia, the UAE and Bahrain cut their interest rates by 50 basis points, following a US Federal Reserve’s decision on September 18. Meanwhile, Qatar cut its deposit, lending, and repo rates by 55 basis points.
This decision marked a shift in US monetary policy after two years of rate increases to contain inflation. At the same time, the Gulf Cooperation Council (GCC) central banks’ currencies are pegged to the US dollar. Therefore, they align their policies to the Fed.
After the 50 basis points cut, the report expected that the Fed will implement more interest rate cuts, with 25 basis point cuts in the subsequent two meetings. This will account for a 100-basis-points reduction for 2024.
The report expected that the interest rate cuts will support Saudi projects under Vision 2030 and further boost non-oil activities. Businesses in sectors such as real estate, construction and infrastructure are ready to take advantage of cheaper credit, leading to more dynamic expansion and investment opportunities.
Oil Prices and Government Spending
The report noted several key factors that impact the valuation of Gulf banks, including oil prices and regional spending. In order to maintain liquidity in the banking sector, the Gulf countries need an average price of $80 per barrel.
However, Saudi Arabia needs an oil price of $108 per barrel to achieve budget balance. This is a result of the significant increase in public spending, which rose by $111bn from 2016 to 2023. With the inclusion of the sovereign wealth fund investments in domestic projects, the total spending has surged by $148bn. This increase in expenditure is associated with several government initiatives that aim to enhance social and economic development.
Promoting Local Investments
The Saudi Public Investment Fund (PIF) reported a 20% increase in assets in 2023, reaching SAR 2.87 trillion ($765.2bn). This growth is largely due to a strong focus on local investments. The funds allocated for domestic infrastructure and real estate projects increased by 15% y-o-y to SAR 233bn. Meanwhile, foreign investments increased by 14% to SAR 586bn.
In parallel, the Saudi government has introduced new laws and reforms to promote local investments, in line with Vision 2030 to diversify its economy away from oil revenues. Amid plans to invest around $680bn in construction projects over the next 5 years, Saudi banks may need about $400bn to finance 60% of these projects, depending on a mix of deposits and additional debt issuance.
Saudi Banks Superiority
The report said that Saudi banks have issued $13bn in debt by August. $6bn of that figure come from sources other than the Saudi National Bank’s certificates of deposits issued in Singapore. This exceeds the $11bn in debt issued by UAE banks during the same period.
Furthermore, the report projected that Saudi banks’ total debt issuance will reach at least $15bn annually, supported by a diversified funding strategy. It also noted that Saudi banks’ debt offerings are 3.7 times oversubscribed, compared to 3 times for UAE banks.
This points to a strong investor confidence and large market liquidity, which enable Saudi banks to get the required capital for expansion as the Kingdom moves forward with its ambitious projects under Vision 2030.
