FINANCIAL INSTITUTIONS

OUTLOOK Banking System Outlook – Saudi Arabia

13 March 2024
Continued non-oil growth, favorable
operating conditions drive positive outlook
Our outlook for the Saudi banking sector remains positive. The banks' operating environment
will continue to be supported by the strong momentum in the non-oil sector, which will
benefit from the accelerated implementation of the economic diversification agenda.
Contacts
Demand for credit for government-backed projects will remain high and translate into
Ashraf Madani +971.4.237.9542 improving loan performance and strong profit for the banks. The expected interest rate cycle
VP-Sr Credit Officer
ashraf.madani@moodys.com
reversal could squeeze margins, although loan growth and lower funding costs could soften
the impact of lower rates. The banks' high reliance on government deposits and increased
Mohamed Salah +971.4.237.9546
Khatteche
market funding on the back of high credit growth will remain a source of risk. Our positive
Lead Ratings Associate outlook also captures the government's strengthening capacity to support banks. Heightened
mohamedsalah.khatteche@moodys.com geopolitical tensions or much lower oil prices remain risks.
Nitish Bhojnagarwala +971.4.237.9563
Senior Vice President
nitish.bhojnagarwala@moodys.com
Henry MacNevin +44.20.7772.1635
Associate Managing Director
henry.macnevin@moodys.com

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Operating conditions benefit from improved macroeconomic conditions and higher business
confidence
Diversification agenda and high government spending will support sustained growth in the non-oil economy. Faster
implementation of Saudi Arabia's Vision 2030 economic diversification projects is the top priority for government expenditure in
2024, which is likely to exceed 2023 budgeted expenditure by 13% and will likely remain high over the next few years. The strong
momentum in the non-oil sectors is set to continue in 2024 and we expect growth to exceed 5%. Employment in the kingdom is
improving and new sectors are being created like entertainment and nonreligious tourism. High oil prices support investor confidence,
positively impacting operating conditions. We expect high-single-digit credit growth for 2024 as Public Investment Fund (PIF) backed
gigaprojects will drive growth for corporate credit while residential mortgages will remain the main contributor to credit demand on
the consumer side.

Loan quality will continue to improve. Lending to low-risk government-backed projects will support Saudi banks' asset quality.
Rising exposure to residential mortgages where most borrowers are government employees with secure jobs provides additional
support and lowers concentration risk. The government is also supporting the contracting sector, historically the largest contributor
to problem loans, to ensure minimum disruption to gigaprojects. We expect nonperforming loans (NPLs) to be around 1.5% of gross
loans, supported by high borrower quality and fast credit growth (denominator effect). Competition in the system is forcing banks to
lend without salaries being assigned to them, but the risk remains limited.

Banks will retain strong capital. Saudi banks have sizable loss-absorption capacity and their capital ratios are among the highest in
the region. We expect the banks to keep their ratios steady despite high credit growth, thanks to strong profits and capital retention.
We expect tangible common equity (TCE)1 to remain stable at around 16% of risk-weighted assets by the end of 2024. Saudi banks'
loss-absorption capacity is further supported by high loan loss reserves, which exceed 100% of the existing stock of NPLs.

Profitability will remain strong. We expect Saudi banks' net income to stabilise at 1.7% of tangible banking assets in 2024 after
recovering well from the 1.4% during the pandemic in 2020 to reach 1.9% as of September 2023, on the back of higher rates and fast
loan growth. Expanding loan books will still support Saudi banks' profits. But margins could come under pressure as the rates cycle
reverses course. This is because earnings on corporate-loan portfolios will be lower, with most repricing on quarterly basis. Nonetheless,
we expect loan growth and lower cost of funds on the back of lower rates will mitigate the impact on net income, which we expect to
remain strong. Funding pressures in the system due to faster loan growth than deposits, have pushed funding cost more than 4 folds
since 2020. We expect loan-loss provisioning costs to remain low and Saudi banks to maintain sound cost controls and high efficiency.

Reliance on market funding will increase slightly. Saudi banks source most of their funding from deposits but we expect modest
increase in market funding over the next 12 to 18 months as credit demand remains strong. Deposit growth has picked up after lagging
credit growth in the past few years. Saudi banks’ reliance on deposits from government and government-related bodies will continue
to expand. More Saudi banks are issuing AT1s or senior unsecured debt to diversify funding and we expect this trend to continue.
Historically, zero-cost demand deposits were the main funding source for banks (around 53% of total deposits in 2023 Vs. 65% in
2021), although the share of more costly term deposits has been increasing as depositors switch to benefit from higher interest rates.
We expect lower rates to ease this shift. Banks will maintain strong liquidity buffers (around 20% of tangible assets, mostly in HQLA
that can be repoed with the central bank) and all of them comply with Basel III's liquidity coverage ratio2.

The capacity of the government of Saudi Arabia (A1 positive) to support failing banks is strengthening. We assume a high
or very high likelihood of government support for banks in the event of a bank failure. This is based on the government's track record
of timely intervention. The positive outlook on the government's rating indicates its capacity to support the banks in times of stress
will potentially increase. Saudi remains a nonoperational resolution regime but, being a G-20 member, it was the first country in
the Gulf Cooperation Council (GCC) to introduce a law for systematically important financial institutions which sets the stage for
implementation of this framework in the future. We will assess the framework upon implementation and may revisit government
support assumptions for banks accordingly.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the issuer/deal page on https://ratings.moodys.com for the
most updated credit rating action information and rating history.

2 13 March 2024 Banking System Outlook – Saudi Arabia: Continued non-oil growth, favorable operating conditions drive positive outlook
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Exhibit 1
Aggregate key indicators for the rated banks
Q3 2023 2022 2021 2020 2019
KEY RATIOS
Problem Loans / Gross Loans 1.9 2.1 2.2 2.5 2.7
TCE / RWAs 16.0 16.2 16.1 16.5 16.6
Net Income / Tangible Assets 1.9 1.8 1.6 1.4 1.8
Market Funds / Tangible Banking Assets 14.0 12.9 10.3 9.9 6.4
Liquid Banking Assets / Tangible Banking Assets 17.5 25.7 27.7 29.5 29.0
ADDITIONAL RATIOS
Loan Loss Reserves / Problem Loans 109.3 105.8 114.4 113.1 101.3
Loan Loss Provision / Gross Loan 0.4 0.4 0.6 1.0 0.8
Tier 1 ratio 17.7 17.7 17.5 18.0 17.3
Total Capital Ratio 19.2 19.3 19.2 19.5 18.6
Shareholders' Equity / Total Assets 13.3 13.9 14.8 14.3 15.3
Problem Loans / (Shareholders' Equity + Loan Loss Reserves) 8.8 9.1 8.8 10.0 9.9
Gross yields 5.4 3.6 3.0 3.3 4.0
Cost of Funds 2.8 1.1 0.4 0.6 1.1
ROAA 1.9 1.9 1.7 1.5 1.9
Net Interest Margin 3.0 2.7 2.7 2.8 3.1
Cost-Income Ratio 33.0 33.5 36.2 35.8 35.3
Loan Loss Provisions/Pre-Provision Income 11.2 11.7 18.8 26.2 19.2
Net Loans / Customer Deposits 98.2 96.5 91.5 86.0 83.2
Credit Growth 8.8 14.0 14.0 13.0 6.6
Deposit Growth 7.1 8.3 7.5 9.1 6.2
Stage 2 / Gross Loans 4.8 5.2 6.1 7.3 6.7
Source: Rated banks' financial statements

Exhibit 2
BCA distribution of Saudi banks as of February 2024
6

4
Number of banks

0
aaa aa1 aa2 aa3 a1 a2 a3 baa1 baa2 baa3 ba1 ba2 ba3 b1 b2 b3 caa1 caa2 caa3 ca c
Baseline credit assessment

Source: Moody's Ratings

Rating universe
We rate 11 commercial banks in Saudi Arabia that together account for 100% of banking system assets (Exhibit 3). The banks' average
standalone Baseline Credit Assessment is baa1 and the average long-term deposit rating is A2, one notch below the government's
A1 stable rating. The banks' long-term deposit ratings incorporate two to four notches of uplift, reflecting the “high” or “very high”
likelihood of government support in a crisis.

3 13 March 2024 Banking System Outlook – Saudi Arabia: Continued non-oil growth, favorable operating conditions drive positive outlook
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In addition to the 11 rated banks, there are a number of foreign banks with Saudi subsidiaries or branches. These are small in size and
mainly involved in project financing, investment banking and syndications.

There are four fully fledged Islamic banks in Saudi that offer only Shariah-compliant products. More details on Islamic banking in Saudi
Arabia are available here.

Exhibit 3
Rated banks in Saudi Arabia
Market
Total assets share Market
Sept 2023 Uplift Adjusted Government Government LC deposit FC deposit total share Market share
Name of the bank (USD million) BCA Parental support from BCA BCA support support notches rating rating Outlook LT CRR assets net loans deposits
Saudi National Bank 273,869 baa1 Low 0 baa1 Very High 3 A1 A1 Positive A1 27.8% 24.4% 24.3%
Al Rajhi Bank 213,703 a3 Low 0 a3 Very High 2 A1 A1 Stable A1 21.7% 24.2% 24.0%
Riyad Bank 100,524 baa1 Low 0 baa1 Very High 2 A2 A2 Positive A1 10.2% 10.9% 10.9%
Saudi Awwal Bank 90,783 baa1 Moderate 0 baa1 Very High 2 A2 A2 Positive A1 9.2% 8.6% 8.7%
Banque Saudi Fransi 66,622 baa1 Low 0 baa1 Very High 2 A2 A2 Positive A1 6.8% 7.1% 7.2%
Alinma Bank 62,015 baa2 Low 0 baa2 Very High 2 A3 A3 Positive A2 6.3% 6.9% 6.9%
Arab National Bank 58,177 baa1 Low 0 baa1 Very High 2 A2 A2 Positive A1 5.9% 6.1% 6.1%
Bank AlBilad 36,682 baa2 Low 0 baa2 High 2 A3 A3 Positive A2 3.7% 4.2% 4.2%
The Saudi Investment Bank 34,616 baa2 Low 0 baa2 High 2 A3 A3 Positive A2 3.5% 3.3% 3.3%
Bank AlJazira 34,464 baa3 Low 0 baa3 High 2 Baa1 Baa1 Positive A3 3.5% 3.2% 3.3%
Gulf International Bank - Saudi Arabia 12,535 ba2 Very High 1 ba1 Very High 4 A3 A3 Positive A3 1.3% 1.1% 1.1%

The market shares shown in the table are calculated as a share of total assets held by the 11 domestically incorporated banks. The table shows the banks’ standalone credit strength
as indicated by our Baseline Credit Assessment scale, and the corresponding trend. A bank’s standalone credit strength reflects its creditworthiness without considering government
or affiliate support assumptions. Long-term bank deposit ratings reflect a bank’s standalone credit strength and support considerations. For more detail, see Moody’s Banks Rating
Methodology.
Source: Banks' financial statements

Exhibit 4
Government support incorporated into our ratings

Standalone credit strenght Affiliate support Government support Government rating

Aa3

A1

A2

A3

Baa1

Baa2

Baa3

Ba1

Ba2

Ba3

Al Rajhi Bank Saudi National Saudi Awwal Banque Saudi Fransi Arab National Bank Riyad Bank The Saudi Investment Bank Alinma Bank Bank AlBilad Gulf International Bank - Bank Al-Jazira
Bank Bank Saudi Arabia

Source: Moody's Ratings

4 13 March 2024 Banking System Outlook – Saudi Arabia: Continued non-oil growth, favorable operating conditions drive positive outlook
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Appendix
Exhibit 5 Exhibit 6
Strong and sustained growth in non-oil economy supports Low-cost domestic deposits remain the main source of funding...
operating environment of banks Banks' liabilities breakdown
Saudi Arabia Non-oil Real Gross Domestic Product - % yoy change Customer Deposits Inter Bank Liabilities Foreign Liabilities
Median - GCC countries Non-oil Real Gross Domestic Product - % yoy change Other Liabilities Shareholders' Equity
8.0% 100%
15% 15% 14% 14% 14% 14%
90%
6.0%
80% 9% 9% 14% 13% 14% 14%
4.0% 70%

2.0% 60%

50%
0.0%
40%
70% 68% 65%
30% 64% 63% 63%
-2.0%
20%
-4.0%
10%
-6.0% 0%
2019 2020 2021 2022 2023 2024F 2025F 2018 2019 2020 2021 2022 2023

Source: Moody's Ratings Sources: SAMA, Moody's Ratings

Exhibit 7
Retail loans have been growing steadily since 2019
Industry breakdown of loan portfolio
Retail (loans to individuals) Manufacturing Utility Real Estate & Construction Trade Transport & Services Financial Institutions Government Others
100%
6% 5% 5%
90% 24%
26% 26%
80% 8% 7% 7%
70%

60% 14%
16% 14%
50%

40%

30%
50% 50% 49%
20% 40% 37%
32%
10%

0%
2018 2019 2020 2021 2022 H1 2023

Sources: SAMA, Banks' financials, Moody's Ratings

Banking System Outlook definition

The Banking System Outlook reflects our view of credit fundamentals in the banking sector over the next 12 to 18 months. Banking sector
outlooks are distinct from rating outlooks, which, in addition to sector dynamics, also reflect issuers’ specific characteristics and actions.

The outlook does not represent a sum of upgrades, downgrades or ratings under review, or an average of rating outlooks.

Endnotes
1 Our preferred measure of capital for reasons of global comparability. Tangible common equity (TCE) = (Common shares + retained earnings and related
reserves + treasury stock + foreign currency translation) minus (Goodwill and other Intangible Assets) minus (Deferred Tax Assets) plus (Impact of Cap on
Deferred Tax Assets)

5 13 March 2024 Banking System Outlook – Saudi Arabia: Continued non-oil growth, favorable operating conditions drive positive outlook
 MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

2 The third Basel accord on banking standards requires banks to hold sufficient liquid assets to fund cash outflows for 30 days.

6 13 March 2024 Banking System Outlook – Saudi Arabia: Continued non-oil growth, favorable operating conditions drive positive outlook
 MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

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8 13 March 2024 Banking System Outlook – Saudi Arabia: Continued non-oil growth, favorable operating conditions drive positive outlook