Saudi Arabia: Saudi Arabia’s efforts toward economic diversification are fueling the growth of its banking sector, with industries such as construction and tourism offering appealing lending opportunities, according to a recent analysis.

In its latest report, the US-based credit rating agency Moody’s said that the performance of the banking sector’s loan portfolio has continued to improve, particularly following the rollout of the Kingdom’s national diversification agenda aimed at reducing dependence on hydrocarbon revenue.

Emphasizing the banking sector’s growth, the Saudi Central Bank, also known as SAMA, reported that the aggregate profit before zakat and tax of banks operating in the Kingdom reached an unprecedented SR7.83 billion ($2.1 billion) in July, reflecting a 23 percent annual increase.

“We expect this trend to persist over the coming 12 to 18 months, further boosting the non-hydrocarbon economy where banks largely operate. Saudi borrowers’ repayment capacity is also supported by government policies and reforms,” said Lea Hanna, an analyst at Moody’s.

She added: “Saudi banks are enjoying lower delinquencies in their loan portfolios, while provisions cover nonperforming loans fully.”

According to Moody’s, Saudi Arabia’s real non-hydrocarbon gross domestic product is expected to grow robustly, by approximately 5.5 percent in both 2024 and 2025, driven by government investments in large infrastructure projects that will increase demand for credit during these years.

The agency also highlighted that construction, along with sectors such as tourism and entertainment, will play a vital role in shaping the growth of Saudi banks’ loan books.

“Although the contribution of giga projects, such as Red Sea and Qiddiyah, to total corporate lending will remain significant, diversification into new sectors, such as tourism, entertainment and renewable energy provide attractive lending opportunities,” said Moody’s.

The report further indicated that lending to small and medium enterprises in Saudi Arabia has increased, although it still represents a small fraction of the overall sector loan book.

Moody’s also pointed out potential risks that could impact the asset quality of banks, including a prolonged period of low oil prices and possible changes in government policy.

“They (banks in Saudi Arabia) remain exposed to downside risks should there be a reversal in economic momentum or a relaxation in authorities’ active support in managing system asset risks,” said Hanna.

In July, another report from Moody’s stated that Saudi banks are likely to see their client base expand due to government-backed economic diversification efforts that are promoting innovation and boosting productivity in the Kingdom.