Banks in Saudi Arabia, the second-largest banking system in the Gulf Cooperation Council, have shown steady growth of lending to the private sector in 2020 despite the impact of the coronavirus pandemic, with the residential mortgage sector continuing to be a bright spot.
It comes as lenders in the United Arab Emirates, the largest banking system in the GCC, recorded a contraction in lending to the private sector in 2020, though this has been compensated for with expansion of credit to government and government-related entities, according to data from the UAE Central Bank.
"In Saudi Arabia, public sector credit growth remains robust, with the cost of commercial credit falling. Meanwhile, private sector lending has continued to grow at its pre-crisis pace," said Ehsan Khoman, head of MENA research and strategy at Mitsubishi UFJ Financial Group.
Overall lending in Saudi Arabia is expected to grow 10% this year, up from 7.3% in 2019, according to S&P Global Ratings, which forecasts loan growth of 7.0% in 2021. Banks are expected to post a sector-average return on average assets of 1.3% this year, down from 1.9% last year, while nonperforming assets as a percentage of systemwide loans are estimated to rise to 2.9% from 2.0% in 2019.
Mortgage growth
While the pace of growth has eased, it remains robust, with banks writing 229,280 new residential mortgages in the first 10 months of this year, an increase of 78.8% over the same period in 2019, according to data from the Saudi Arabian Monetary Authority.
"Overall loan growth this year has been strong, while mortgages have been one of the major drivers of loan growth, this year and in the past few years," said Nauman Khan, a senior research analyst at NCB Capital.
The sector is expected to continue to grow, but at a diminishing pace as it is rising from a low base, according to analysts.
The Islamic mortgages offered in Saudi are written with relatively high profit rates — and often set for the full term of the loan — in a market that most analysts see as still developing.
However, there has been a rationalization of rates this year, said Khan.
'Strong demand'
Government support has played a role in the development of the sector, although two subsidy schemes were discontinued earlier this year as the government looked to trim spending. The largest mortgage payment support program, for mid- and lower-income first-home borrowers, remains in place and is expected to continue.
"I believe [subsidies] will be a mainstay of the housing support schemes but the housing sector demand cycle could also be impacted in a low growth scenario. For now, housing demand is strong," said John Sfakianakis, chief economist and head of research of the Gulf Research Center, a think tank.
Home ownership levels — a key goal for the Saudi Vision 2030 initiative — have been rising, with the government targeting a level of 60% at the end of 2020, ahead of its longer term goal of 70% by 2030, from a level of around 50% in 2018.
That level of domestic demand is in contrast with the housing market in the UAE, which is expat-dominated and where valuations across most segments have fallen due to a supply glut, weakness in the economy and the impact of the pandemic.
There are also structural differences in respect to loan to value caps in the two markets, said Oliver Morgan, head of real estate development at Deloitte Middle East. In the UAE, expatriates — who make up a significant majority of the population — are required to have a 25% down payment to purchase a finished property or a 50% down payment for an off-plan purchase, though developers have stepped in with extended payment plans for such inventory. In Saudi Arabia, the loan-to-value cap stands at 90%.
In Saudi Arabia, banks increasing the complexity of consumer credit checks via the Saudi Credit Bureau could help inform risk-adjusted lending, said Morgan. "More transparent credit history information may enable banks to configure new mortgage products tailored for the low to mid income households, but there is still likely to be an ongoing influence from government in order to enable further private sector investment in this area," he said.
Outlook for 2021 and beyond
Lending to the private sector has also grown in 2020, though government stimulus has also played a role, with support extended to the small and mid-size enterprise sector.
The rollout and continuation of mega projects will be a factor in the growth of corporate lending, said Khan. In recent years the Public Investment Fund of Saudi Arabia has played a larger role in driving these forward, he said. Last month the sovereign wealth fund announced it would inject $40 billion annually in the economy in 2021 and 2022, following divestment of some overseas assets.
S&P Global Ratings forecasts a 4.5% drop in real GDP, with recovery in the following years running at average growth in real GDP of 2.4% over 2021-2023.
Overall though oil prices will remain pivotal for the economy. S&P Global Ratings expects oil prices to average $50 per barrel of Brent in 2021-2022 and then $55/b in 2023 and beyond. That is far below the fiscal break-even price for Saudi Arabia’s budget, which the IMF estimates will be $78.2/b in 2020, falling to $67.9/b in 2021.
"Credit expansion to the private sector is expected to grow, but downside risk will prevail as oil prices should remain subdued in 2021," said Sfakianakis