The Saudi banking system is embarking on a new playing field, as the majority of banks are increasing their capital as much as 100 percent, as in the case of Riyad bank. The new capital infusion will provide banks with the opportunity to increase their lending activities and avoid breaching the credit concentration requirements, stipulated in the banking control law of 1966. Given that the loans-to-deposits (L/D) ratio peaked last August at 83.1, banks have been attempting to lower that ratio as per SAMA’s (Saudi Arabian Monetary Agency’s) guidelines. SAMA’s policies have been essential in guiding banks through the financial crisis and supporting banks to reach new feats, according to a report by the National Commercial Bank.
The bulk of banks’ deposit liabilities is represented by demand deposits which gained 17.3 percent Y/Y by the end of January. Businesses and individuals have added 16.4 percent Y/Y to their demand deposits while government entities increased their demand deposits by 28.5 percent on annual basis to reach a record SR75.7 billion.
Meanwhile, the NCB report said interest-bearing counterpart lags behind, as it is difficult to lure businesses and individuals given the low interest rate environment. However, government entities’ pursuit of longer maturities has increased their time and savings deposits to SR153.0 billion, a gain of 20.3 percent annually by the end of January. Furthermore, other quasi- monetary deposits increased at an annual 10.6 percent, with a notable deceleration in the outstanding remittances following the correctional program of the labor market.
On the assets side, total claims of the banking system, excluding T-bills and government bonds, maintained its pace at an annual 12.0 percent gain for the month of January. Given the higher base in 2013, growth rates were anticipated to slow after peaking at 16.7 percent in December 2012. Regardless of the deceleration, the credit market is likely to maintain a stable upward trajectory. The fiscal expansionary policy of the Kingdom will maintain demand for financing. As total loans were outpaced by total deposits’ growth, the L/D ratio dropped to 79.0, reflecting a lower utilization ratio. Regarding the maturity of credit, banks continue to seek longer-term opportunities. Short-term credit gained by 9.5 percent Y/Y and medium-term credit expanded by only 7.4 percent annually during January. Mean- while, long-term credit accelerated at 20.8 percent Y/Y to reach SR330.9 billion, a new record.
The private sector is expected to drive the economy this year. Consequently, private sector credit will likely maintain double-digit growth rates throughout 2014. Banks were able to expand their portfolio by extending credit to the private sector with an additional SR116.0 billion during the twelve months through January, an 11.9 percent annual addition. Furthermore, claims on the public sector grew by 24.7 percent Y/Y driven by the increase in T-bill issuances, the report said,
The government’s control on excess liquidity resulted in a 29.5 percent rise in T-bills, reaching SR185.4, another record high achieved this January. Additionally, government bonds rose by 19.0 percent on an annual basis. As for the government’s policies, SAMA governor announced Saudi’s intention of maintaining its current monetary policy despite the tapering in the US.
However, we expect a change in tone once the US completely withdraws its QE program and starts to hike rates. Saudi Arabia is accustomed to the wait-and-see approach and a preemptive decision regarding its policy is highly unlikely, the NCB report said.