RIYADH: Saudi Arabia's banking sector is currently undergoing a pivotal transformation, instigated by a burgeoning demand for mortgages and the far-reaching objectives of the Saudi Vision 2030 program. To sustain this growth, financial institutions are exploring alternative funding avenues. A surge in mortgage financing has been significant, vaulting from 12.8 percent of total credit allocation in 2019 to 23.5 percent by the end of 2023, a report by S&P Global disclosed.

The Vision 2030 economic initiative, coupled with a relatively sluggish deposits growth, is compelling banks to consider external funding sources. The quest for external funds is expected to alter the Saudi banking sector's funding profiles substantially. Lending growth has notably outpaced deposits, driving the loan-to-deposit ratio past 100 percent in 2022.

Adapting to these financial shifts, Saudi banks have begun tapping into international capital markets, a trend predicted to extend over the forthcoming three to five years. The Saudi banking system's status could shift from a net external asset to a net external debt position within coming years. Corporate lending, driven by increased economic activities, is set to play a crucial role in this growth trajectory.

The private sector's leverage is poised to ascend, albeit from low levels, with S&P Global Ratings estimating the total investments demanded by the Saudi Vision 2030 to approximate $1 trillion over several years. A significant fragment of investments is anticipated to emanate from the Public Investment Fund and the government. However, banks and capital markets are also envisioned as key contributors.

Additionally, the recent past has witnessed substantial lending growth attributable to mortgage expansion. This mortgage growth has not translated into considerable publicly listed corporate debt, primarily due to the prudent capital expenditure commitments by Saudi companies in response to high interest rates.

The banking landscape in Saudi Arabia is bracing for potential imbalances and asset-quality challenges that may emerge from escalated private-sector leverage. However, the Saudi banking system has maintained sturdy health, characterized by sound profitability, conservative dividend practices, and robust overall assets and capitalization.

In lieu of solely raising debt, Saudi corporations are actively harnessing new equity avenues, including initial public offerings (IPOs), to bolster their financial standing. Such measures, combined with strong internal cash flow generation, aim to mitigate corporate debt accumulation. Moving forward, the S&P Global Ratings will persist in monitoring the build-up of corporate debt within the kingdom, projecting a gradual debt growth concentrating on the Public Investment Fund's portfolio companies.

Despite the challenges posed by heightened interest rates and geopolitical risks, which may affect spreads for weaker companies, Saudi Arabia's economy is anticipated to grow. The non-oil growth, bolstered by government-led investments, is expected to contribute increasingly to the total gross domestic product (GDP), in line with the objectives of Vision 2030.

The transformation of the Saudi banking sector aligns with the broader economic reforms underway in the kingdom, spurred by the Saudi Vision 2030 program. This economic blueprint aims to diversify the economy away from oil and engender a more sustainable and dynamic financial environment. The demand for institutional and retail credit, especially in the real estate and construction sectors, has been a driving force behind the current financial landscape.

The substantial investment in infrastructure and new cities, as part of the Vision 2030, has required a dynamic approach to financing. This has come at a time when banks are also facing the need to comply with international financial reporting standards and Basel III regulations, which demand higher quality and quantity of capital buffers. These regulations aim to enhance the risk management and liquidity standards of banks, further strengthening the financial system in the face of global economic challenges.

Given the current context, Saudi Arabian banks are likely to continue evolving their products and services to meet the requirements of diverse consumer bases. Digital banking services, for instance, are gaining prominence, with financial technologies playing a pivotal role in reaching a broader audience and catering to the young, tech-savvy population that constitutes a significant portion of the kingdom's demographic.

The housing market expansion is a cornerstone of the government's strategy to provide greater home ownership opportunities for Saudi citizens. Consequently, mortgage financing has experienced an unprecedented boom, contributing to the larger share of credit allocations. This is directly in response to the ambitious targets set by the Saudi government to increase home ownership among Saudi nationals to 70 percent by 2030 under the Vision 2030 housing goals.

However, as Saudi banks look outward for funding, they must navigate international credit markets' intricacies. Global economic fluctuations, oil price volatility, and regional tensions can impact the cost and availability of external funding. The banks' foray into international markets may thereby hinge upon maintaining strong credit ratings and demonstrating a track record of stability and resilience in their operations.

In terms of asset quality, Saudi Arabian banks have generally performed well, with low non-performing loan ratios relative to the region. This robust asset quality is set to be tested as banks extend more credit to private sector enterprises that are instrumental in executing the Vision 2030 projects. The focus on corporate loan portfolios will also necessitate enhanced credit risk assessments to prevent potential non-performing assets, preserving the solid foundations of the financial institutions.

To conclude, the Saudi banking sector exemplifies the adaptability and foresight required to support an ambitious national transformation. With prudent regulatory oversight and strategic financing models, the sector is well-positioned to facilitate the kingdom's economic diversification while navigating the inherent risks and opportunities associated with such holistic change. The unfolding of these developments will be a testament to the ingenuity and resolve of the Saudi financial industry in the years leading up to 2030 and beyond.