Credit Growth and Vision 2030 Drive Saudi Banking Sector Resilience
The Saudi banking sector has once again demonstrated robust financial fundamentals and adaptability to geopolitical challenges, supported by strong financing momentum and Vision 2030 projects. According to the "Saudi Banks Pulse" report by Alvarez & Marsal, customer deposits grew by 3.9% in the first quarter of 2026, surpassing net financing growth of 1.6%, reducing the loan-to-deposit ratio to 104.1% from 106.5% in the previous quarter.
Hazim Almegren, managing director of Alvarez & Marsal in the Middle East, attributed the strength of institutional lending to "structural and investment-driven rather than cyclical" motivations. He stated that the continued implementation of Vision 2030 projects and strong banking fundamentals have maintained financing demand momentum. He added that the slowdown in loan growth alongside geopolitical tensions is expected to be temporary, with state-backed investment continuing to play a key role.
Deposit Competition and Profitability Outlook
The report highlighted intensified competition among banks for low-cost deposits, with strong deposit growth driven largely by term deposits. Almegren expects a greater focus on current and savings accounts as the most stable and least costly funding sources. He noted that protecting these deposits will be a key determinant of profitability over the next 12 to 24 months.
Consolidated net profits grew by 1.2% quarterly, compared to 0.2% in the previous quarter. Return on assets stabilized at 2%, while return on risk-weighted assets remained at 2.7%. Six of the 10 largest listed banks recorded a decline in net interest margins, but the sector maintained a stable net interest margin of 2.84%, supported by a decrease in funding costs to 3.2%.
Almegren predicted that credit growth supported by Vision 2030 projects will be the most influential driver of gross profits for 2026, rather than margin expansion. He emphasized that the current banking strategy focuses on improving asset mix and targeting sectors with attractive risk-adjusted returns, while diversifying income sources and increasing non-interest income.
Strong Liquidity and Asset Quality
The sector's liquidity coverage ratio reached approximately 172%, rising to 312% at Saudi National Bank. Almegren ruled out that this indicates liquidity hoarding due to caution over geopolitical developments, explaining that it reflects strategic balance sheet management and bank-specific market conditions.
Non-performing loan ratio stabilized at a record low of 0.9%, reflecting sustained credit portfolio quality. The cost of risk dropped sharply to 0.15% from 0.4% in the previous quarter, driven by credit portfolio recoveries. Saudi banks maintained strict precautionary policies, boosting the non-performing loan coverage ratio to 162.6%.
Attractive Valuations and Operational Challenges
The report revealed that Saudi banks' valuations remained attractive, with shares trading at a price-to-earnings ratio of 10.8 times and a price-to-tangible book value ratio of 1.6 times. These metrics indicate low investment risk and a high margin of safety for investors.
However, operational challenges emerged: combined operating income declined by 2.3% to SR40.4 billion ($10.76 billion), impacted by a 13.2% drop in non-interest income. The cost-to-income ratio rose to 30.1%, reflecting escalating operating expenses and competition for high-cost deposits.
Almegren placed these figures in a strategic context, noting that the rise in expenses is driven by capital expenditure on technology infrastructure, digital transformation, and AI applications. He described these as "long-term investments" rather than transient pressures, expected to boost productivity and enhance operational efficiency over the medium to long term.
Indicators suggest that Saudi banks are entering a new phase where interest rates recede as a primary earnings driver, with asset quality, operational efficiency, technology investments, and income diversification becoming increasingly vital for sustainable growth.
