Saudi Banks Showed Resilient Profits Despite Rising Costs in 2024

Saudi banks play an important role in capital markets, contributing significantly to liquidity and investment activity.

Saudi banks weathered the storm in 2024 with a lending hand from robust asset quality, improved cost efficiency, and credit management.

The Kingdom of Saudi Arabia Banking Pulse report published by Alvarez & Marsal (A&M) in 2024 found that banks maintained their profits despite having high funding costs due to high deposit competition and increased dependence on external borrowing.

A separate analysis from Fitch Ratings reported that lower interest rates impacted the bank’s revenue.

Alvarez & Marsal cited that strong credit quality was the key to the bank’s profits.

The non-performing loan ratio improved by 18 basis points to 1.1%, showing the bank’s risk management and healthy loan portfolios. Loan loss coverage was steady at 161%, providing a robust safeguard against defaults. The cost of risk decreased to 0.3%, a sign of lower impairment and better-quality loans.

Lower impairment made banks set aside more profits than saving funds in case of bad loans.

The banking sector is the main character for Vision 2030 as Saudi Arabia plans on economic diversification, as it helps finance large-scale projects, business expansion, and capital market growth.

Saudi banks play an important role in capital markets, contributing significantly to liquidity and investment activity. Bank stocks are the most actively traded on the Saudi Stock Exchange, driving market turnover.

A&M report showed that Saudi banks have excellent cost control in 2024, maximizing operating costs and maintaining revenue growth. So, the cost-to-income ratio improved by 63 basis points, dropping to 31.3 percent, reflecting its efficiency of bringing more income than expenses.

Cost optimization helped it contribute 9.3% year-on-year growth in operating income, which was more than 7.1% in operating expenses. It boosted the aggregate net income by 13.5% to SR79.6 billion.

The report identified that the players responsible for the annual growth were SR7.9 billion in net interest income, SR2.6 billion in net fee and commission income, and SR1.6 billion in other operational income.

However, the net interest income growth slowed to 7.6% in 2024 from 11% in 2023 due to increased funding costs.

There was an increase in Saudi banks’ funding costs due to the change in global financial trends and local liquidity limitations. As deposit growth lags behind credit expansion, banks looked for alternative funding sources to sustain the lending activity.

The gap was when government-related entity (GRE) deposits, which contributed one-third to the total sector deposits, were moved into banks with higher returns than holding in Saudi Central Bank or SAMA.

The launch of SAMA’s deposit auction platform made the GRE deposits from SR670 billion in 2023 to SR460 billion in early 2025.

The Fitch Ratings state that Saudi banks witnessed a rare SR27 billion, or 1%, loss in deposits in the fourth quarter of 2024, the first decline since 2019.

However, the deposits later recovered by SR40 billion in January, compensating for the loss in the fourth quarter.

The A&M report stated that even as deposits rebounded, their growth was not as strong as lending expansion, which increased 14.4% in 2024, more than a 7.9% increase in deposits.

It led to the loan-to-deposit ratio of 104.7%, surpassing 100% mark for the first time in recent years.

Since corporate lending is essential for mega projects and infrastructure development, banks have started relying on sukuk issuances to bridge the liquidity gap. Since they cost more than traditional deposits, it adds to the funding expenses. Fitch warned that increasing reliance on external funding could pressure some bank’s funding and liquidity scores.  

As Saudi banks navigate the sea of challenges, they focus on improving funding strategies, utilizing long-term debt instruments, and growing the capital market, allowing lending growth while controlling funding costs.