Fitch: Saudi bank liquidity could benefit from NPL securitisation

SAR banknotes

Fitch Ratings said on Wednesday that liquidity conditions and capital ratios at Saudi banks could gain from the potential securitisation of non-performing loans (NPLs), noting that such a move would help diversify funding sources and support the development of the Kingdom’s debt markets.

In a report, the agency forecast credit growth in Saudi Arabia’s banking sector of between 12% and 14% in 2025, with lending continuing to outpace deposits.

Fitch added that the nominal value of bonds issued against securitised NPLs would likely be close to the net balance sheet value of those loans, based on existing provisions.

The agency also noted that banks may consider securitising written-off exposures. However, the nominal value of bonds issued against these would be limited, given that most of the exposures are severely impaired. Saudi banks wrote off SAR 43 billion ($11.5 billion) in bad debts between 2022 and 2024.

Fitch believes that any increase in core capital ratios as a result of NPL securitisation would be modest, indicating that even a full securitisation of NPL portfolios would trigger only limited provision reversals.

As of the end of 2024, the sector’s net stock of NPLs stood at just 0.5% of total risk-weighted assets, with asset growth expected to continue.

The report said that persistent lending growth outstripping deposit growth in 2025 will widen the deposit gap. While securitising all NPLs would not significantly narrow this gap, Fitch said it would have little impact on its credit growth outlook for the sector or on the financing of Saudi Arabia’s giga-projects, given the relatively low NPL ratios at Saudi banks.

The agency also noted that banks could expand their securitisation of residential mortgage loans, saying this would have a meaningful impact on funding diversification and the development of debt markets.

Some banks have already issued limited tranches of mortgage-backed securities through the Saudi Real Estate Refinance Company (SRC), though Fitch said the use of mortgage securitisation remains modest.