Saudi banks see slower growth as funding costs rise

By Vriti Gothi

Saudi Arabia’s banks recorded steady but moderating performance in the third quarter of 2025, as higher funding costs and softer deposit growth weighed on margins, while lending activity, cost efficiency, and asset quality remained broadly resilient, according to a new report by Alvarez & Marsal.

The latest edition of the professional services firm’s KSA Banking Pulse analyses the financial results of the Kingdom’s 10 largest listed banks, including Saudi National Bank, Al Rajhi Bank, Riyad Bank, and Saudi British Bank. The report provides a snapshot of how the sector is adapting to tightening liquidity conditions and an evolving interest-rate environment after several quarters of strong earnings momentum.

Aggregate gross loans and advances increased 2.5% quarter-on-quarter, in line with the previous quarter. Corporate lending, which represents around 59% of total credit, rose 3.0%, reflecting continued demand from large businesses and government-linked projects. Retail lending grew 1.7%, marking a modest acceleration compared with the second quarter. In contrast, deposit growth moderated to 2.2%, down from 2.7% in the previous quarter, driven by weaker deposit mobilisation across several lenders. Declines in both demand and time deposits at Saudi National Bank were a key factor, while government-related entity deposits edged lower, reducing their share of total deposits to 31.2%. As a result, the sector’s loan-to-deposit ratio increased slightly to 106.2%.

Revenue growth slowed during the quarter as funding pressures intensified. Operating income rose 1.8% quarter-on-quarter, compared with 2.0% in the previous quarter. Net interest income was broadly flat, as higher loan yields were offset by rising funding costs. The sector’s net interest margin declined by seven basis points to 2.73%, reflecting an increase in the cost of funds to 3.6%, which outpaced the rise in yields on credit to 8.2%.

Despite margin compression, overall profitability remained supported by non-interest income. Aggregate net income increased 2.8% quarter-on-quarter, compared with 3.4% in the previous quarter. Fee and commission income rose 3.8%, while other operating income increased sharply, particularly at Saudi National Bank and Al Rajhi Bank, helping to offset slower core income growth.

Cost discipline continued to improve across the sector. Operating expenses declined 0.9% during the quarter, contributing to a third consecutive quarter of improvement in the aggregate cost-to-income ratio, which fell to 28.7%. Efficiency gains were evident across several large banks, reflecting tighter expense control and operating leverage.

Asset quality trends remained favourable. The non-performing loan ratio declined to 0.94%, while the coverage ratio increased to 158.1%, indicating stronger provisioning buffers. Returns remained stable, with return on equity edging up to 15.5% and return on assets holding steady at 2.1%.

Commenting on the findings, Sam Gidoomal, Managing Director and Head of Middle East Financial Services at Alvarez & Marsal, said “Saudi banks continued to demonstrate operational resilience during the quarter despite margin pressures. Quentin Mulet-Marquis, Managing Director, Financial Services, noted that low non-performing loan levels, strong capital positions, and stable earnings continue to underpin investor confidence, even amid periods of global market volatility.”

Capital adequacy across the sector strengthened further, with the aggregate capital adequacy ratio rising to 20%, providing balance sheet flexibility as banks enter 2026 facing tighter funding conditions and more uncertain global financial markets.