Normal Saudi bank credit to take time

Saudi Arabia’s banks need time to resume normal domestic lending as they are still risk-averse towards the private sector and demand for credit by local companies has remained weak, a key Saudi bank has said.

While credit to the public sector is gaining pace, the government should end its financing monopoly and give banks a bigger part in funding public projects, Banque Saudi Fransi (BSF) said in a study.

Its figures showed the bulk of growth in lending in the third quarter of 2010 stemmed from loans to government and quasi-government bodies and utilities, which grew 17.9 and 14.3 per cent, respectively, compared with the year earlier.

Lending to companies categorised under “commerce” also rose 5.1 per cent, the report said, citing figures by the Saudi Arabian Monetary Agency (SAMA).

In other sectors, loan growth continues to lag, it said, adding that credit to transport and communications fell 2.5 per cent year on year in the third quarter while credit to the manufacturing sector was down by around 1.1 per cent and to services by nearly 27.4 per cent in the same period.

“The gradual pace of the credit recovery cycle is not a Saudi-specific phenomenon. Historical evidence from Latin America and South East Asia show credit booms are followed by a slowdown phase,” BSF said.
“Recent IMF work shows that a credit recovery may take three years following a financial crisis. Saudi Arabia, while it did not suffer a financial crisis per se, witnessed a sharp contraction in demand and supply of credit in 2009.”

The report said it believed the reversal of this trend should be gradual to permit bankers to allocate credit effectively and enable the private sector enough time to re-engage in both productive and equity market investments.

“Even private property owners are freezing positions, neither selling nor buying substantial tracks of land,” it added.

According to the report, a key challenge in the coming two years will be in striking the right “funding mix balance” for strategic projects between government funding, bank credit and financing raised through debt markets.

It said that over the past two years, Saudi Arabia, the largest Arab economy, has foot the bill for many strategic projects largely because doing so made financial sense due to rising costs of credit.

“As credit and debt markets stabilize, the government should seek where possible to ensure that a share of financing for strategic projects – particularly those in energy, transportation and utilities – is set aside for banks,” it said.

“Banks, still risk averse in the aftermath of the financial crisis and domestic non-performing loans, continue to prefer extending credit to large-scale projects

with government backing….. it will take time before small and medium-sized enterprises are able to catalyze a good revival in domestic credit growth, so engaging banks in large projects will set the stage for a wide-scale, diversified lending in the coming years.”

The report referred to the recent $1.3 billion loan agreement signed between
state-run Saudi Aramco and France’s Total with the Saudi Public Investment Fund for a joint oil refinery being built at Jubail to boost capacity by 400,000 bpd.

It said the venture has so far secured about $9.8 billion in financing for the $12.8 billion refinery, adding that the PIF and export credit agencies have contributed more than half of the funds so far.
“While it is encouraging to see banks getting involved, the government should strive to reduce its financing role to minority status in the coming year.”

Banks in Saudi Arabia and neighbouring Gulf countries have tightened their lending purses following the eruption of the 2008 global fiscal crisis and regional debt default problems. Domestic credit in the region has remained as low as one to three per cent over the past two years compared with more than 30 per cent in some members during the pre-crisis 2007-2008 boom period.

The sharp slowdown in lending has allied with a surge in loan loss provisions to stifle the profitability of banks in all regional nations.

In Saudi Arabia, the consolidated net income of the country’s 12 commercial banks dipped to around SR20.2 billion in the first nine months of this year from SR22.35 billion in the first nine months of 2009.
Data by the Riyadh-based Jadwa Investments showed the Kingdom’s banks have allocated SR20.4 billion for loan loss provisions over the past two years.

“The main reason for the decline in the banks’ profits was an increase in the amount of money they have set aside to cover bad loans.”

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