Saudi banking sector takes resilient strides towards 2026

Saudi banks are navigating a classic late‑cycle pivot — solid credit demand and clean books offsetting thinner margins — and they are doing so with leaner cost structures, rising fee franchises, and ample capital, a report showed.

According to the latest KSA Banking Pulse by Alvarez & Marsal (A&M), despite a shifting rate environment and rising funding costs, the Kingdom’s largest lenders continued to post solid profitability in the third quarter, underscoring the sector’s ability to adjust its balance sheets, extract efficiencies and protect earnings in a late‑cycle environment.

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The top ten listed banks delivered another stable quarter, even as monetary easing began to reshape sector dynamics. Aggregate net income rose 2.8 per cent quarter‑on‑quarter, supported by strong non‑interest income growth and firm cost discipline across most institutions.

Credit demand remained healthy, with gross loans and advances rising 2.5 per cent, driven by 3.0 per cent growth in corporate lending and a pickup in retail lending to 1.7 per cent, aided by stronger credit card activity. Deposits, however, expanded at a slower 2.2 per cent, moderating from 2.7 per cent in the previous quarter as the sector continued to witness a shift from low‑cost CASA to higher‑yielding time deposits. This shift pushed the loan‑to‑deposit ratio to 106.2 per cent, an indication of tightening liquidity conditions that banks will likely need to manage more actively moving into 2026.

Revenue growth was driven less by interest income and more by diversification. Net interest income was virtually unchanged at +0.1 per cent QoQ, squeezed by higher funding costs. In contrast, fee and commission income rose 3.8 per cent, while other operating income surged 12.6 per cent, led by strong contributions from Saudi National Bank (SNB) and Al Rajhi. Operating income grew 1.8 per cent, a reflection of resilient underlying activity even as margins softened.

Expenses provided a meaningful buffer. With operating costs down 0.9 per cent, the sector achieved its third consecutive quarter of efficiency gains. The cost‑to‑income ratio improved by 80bps to 28.7 per cent, driven by sharper operational discipline at banks such as SNB — which cut operating expenses by nearly 10 per cent — and Riyad Bank, which recorded a 3.8 per cent rise in operating income that outpaced its expense growth.

Margin pressures nonetheless persisted. The net interest margin slipped 7bps to 2.73 per cent, driven by a 22bps rise in the cost of funds to 3.6 per cent, outstripping the uplift in yields on credit. As customers continued migrating into term deposits, spreads narrowed, and banks were forced to rely more heavily on non‑interest income and cost control to protect profitability. The trend is expected to continue, particularly in a lower‑rate environment.

Still, returns held up. Return on equity edged up 6bps to 15.5 per cent, and return on assets held steady at 2.1 per cent, reflecting the durability of earnings even as structural pressures emerged. Asset quality also improved: the NPL ratio declined to 0.94 per cent, with recoveries strong enough to push the coverage ratio to 158.1 per cent. Lower provisions brought the cost of risk down to 0.24 per cent, marking another quarter of incremental improvement.

A&M’s senior leadership underscored the sector’s underlying resilience. “Saudi banks continued to demonstrate operational resilience during Q3 2025, supported by stable lending activity, disciplined cost management, and improving asset quality,” said Sam Gidoomal, Managing Director and Head of Middle East Financial Services. “Despite margin compression, the sector’s strong capital position and consistent efficiency gains position banks well as they prepare for an evolving interest‑rate environment in 2026.”

The sentiment was echoed by Quentin Mulet‑Marquis, Managing Director, who highlighted the broader operating backdrop. “Strong earnings, low NPL rates and comfortable capital buffers underpin investor confidence. Competitive dynamics, valuation support and sustained credit quality continue to strengthen the case for M&A interest in the sector.”

Banks ended the quarter capitalised for growth, with the capital adequacy ratio rising to 20.0 per cent — a solid cushion ahead of SAMA’s countercyclical capital buffer increase to 1 per cent in May 2026.

Outlook for 2026

As Saudi Arabia moves into 2026, banks are expected to operate in a lower‑rate, tighter‑liquidity environment that will amplify competition for deposits and put continued pressure on margins. The easing cycle led by SAMA will likely compress NIMs further, raising the importance of fee income growth, balance‑sheet optimisation and digital‑led productivity gains.

Asset quality is expected to remain robust, supported by stable economic fundamentals and improving non‑oil sector activity. However, funding costs, regulatory adjustments — including the upcoming countercyclical buffer — and intensified competition in retail and SME segments will shape strategy over the next year.

Institutions that can broaden non‑interest revenue, maintain strict cost discipline and strengthen funding profiles are best positioned to sustain profitability. With Vision 2030 investment momentum continuing and credit conditions still accommodative, the sector enters 2026 with resilience — but also with a need for sharper balance‑sheet management as macro conditions evolve.

Somshankar Bandyopadhyay

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somshankar@khaleejtimes.com

Somshankar Bandyopadhyay is a News Editor with close to three decades of experience. Currently, he manages the business section, ensuring that the top economic and business news of the day reaches its readers.