Saudi Banking Sector: Navigating Liquidity Risks for Profitable Growth

The Saudi Arabian banking sector is at a pivotal juncture. While loan-to-deposit ratios (LDR) have surged to historic highs, signaling liquidity pressures, profitability remains robust, driven by strategic cost management and Vision 2030's economic diversification push. For investors, this creates a compelling opportunity to capitalize on banks with strong current account and savings account (CASA) deposits and diversified income streams—despite the sector's near-term challenges.

The Liquidity Tightrope: Risks and Realities

The sector's LDR hit 104.7% in FY2024, a 6% YoY increase, as loans outpaced deposit growth. Corporate lending surged 17.7% YoY, fueled by infrastructure projects and real estate development. However, deposit growth slowed to 7.9%, with term deposits lagging at just 4.7%. This imbalance has pushed banks to rely on costly short-term funding, including repo facilities and international bonds.

Yet, the Saudi Central Bank (SAMA)'s weighted LDR calculation—factoring in stable CASA deposits and secured loans—remains at 83%, well below the 90% regulatory cap. This underscores the sector's resilience:
- Strong Capitalization: Banks maintain a Common Equity Tier 1 (CET1) ratio of 15.7%, providing a buffer against shocks.
- Asset Quality: Impaired loans fell to 1.4%, with provision coverage at 114%, reflecting disciplined risk management.

Profitability Drivers: Beyond Net Interest Margins

While net interest margins (NIM) contracted to 2.95% due to rising funding costs, banks are mitigating this through:
1. Non-Interest Income: Al Rajhi Bank's non-interest income grew 15.2% QoQ in Q3 2024, driven by fees and digital banking services.
2. Cost Efficiency: The sector's cost-to-income ratio dropped to 31.3%, highlighting operational discipline.
3. SME and Retail Growth: SME loans expanded 27.6% in 2024, supported by government-backed guarantees like Kafalah, reducing default risks.

Key Banks to Watch: Al Rajhi and Samba Lead the Way

Al Rajhi Bank (1180.SA)

• Strengths:
• CASA Dominance: Holds 63.3% of deposits in current/savings accounts, reducing reliance on volatile term deposits.
• Diversified Earnings: Non-interest income now accounts for 22% of total revenue, including wealth management and digital platforms.
• Performance: Net profits rose 34% YoY in Q1 2025, outpacing peers.

Samba Financial Group (1000.SA)

• Strengths:
• Strong Liquidity: Maintains a CASA ratio of 54%, with a conservative LDR of 95% (below the sector's unweighted average).
• Asset Quality: Impaired loans at 0.9%, reflecting prudent lending.
• Performance: 17.2% YoY net profit growth in Q1 2025, driven by fee-based income and cost cuts.

Why Invest Now?

Despite liquidity pressures, the sector's fundamentals remain intact:
- Vision 2030 Tailwinds: Infrastructure spending, tourism expansion, and SME growth will sustain loan demand.
- Regulatory Support: SAMA's open banking framework and fintech initiatives are unlocking new revenue streams.
- Valuation Attractiveness: Banks trade at 1.2x book value, a discount to GCC peers, offering upside as efficiency gains materialize.

Risks to Monitor

• Deposit Growth Slowdown: If CASA expansion stalls, funding costs could rise sharply.
• Global Rate Dynamics: U.S. Federal Reserve policies may impact Saudi funding costs.
• Sector Concentration: Overexposure to real estate and construction loans could amplify risks if economic growth slows.

Conclusion: A Selective Opportunity

Saudi banks are navigating a tightrope between aggressive lending and deposit growth constraints. However, institutions like Al Rajhi and Samba—boasting robust CASA ratios and diversified income—are positioned to thrive. With Vision 2030's $2 trillion in planned infrastructure spending and a resilient macro backdrop, now is the time to invest in banks that balance growth with liquidity discipline.

For investors seeking high returns in a region on the rise, Saudi Arabia's banking sector offers a compelling risk-reward profile. The key is to look beyond headline LDR numbers and focus on banks with the structural advantages to turn liquidity challenges into long-term success.