Saudi Arabia’s banks are expected to loosen the tight noose on their lending purses and expand credit operations through 2011, taking advantage of higher public spending and recovering private sector, a Kuwait bank has said.
Credit by the Gulf Kingdom’s 12 commercial banks is already picking up, growing by around 3.9 per cent in 2010 although growth remains negligible compared to the lending boom before the 2008 global fiscal crisis.
“Saudi banks’ loan portfolio seems to be back on the rising path. The loan book of the listed banks after recording an increase of 3.9 per cent in 2010, are expected to record even stronger growth of 12.1 per cent in 2011,” Global Investment House (GIH) said in a study.
“Furthermore, any debt restructuring deals (i.e. debt financing in distressed scenarios) on the face of it may appear as troubled corporations asking for support; but it also provide opportunities for the banks to renegotiate facilities at higher interest rates (due to raised risk profile of the clients), thus generating extra interest income for the banks.”
GIH said that with the sector’s loan to deposit ratio currently standing at around 82 per cent, there is still ample growth opportunity before the banks reach the domestic regulatory limit of 85 per cent.
“Our optimism regarding loan growth in near future is based on the revival of business confidence, the banks’ willingness (with caution) to loosen up credit extension, enhanced public spending with various infrastructure projects in the pipeline, and higher private sector participation to fulfill innate domestic demand.”
The report said it expected the loan portfolio to record an annual growth rate of around 13.9 per cent through 2010-2014, adding that the Saudi banks’ customer deposit base remains dominated by demand deposits which constitute around 57 per cent of total customer deposits.
“The well capitalized and relatively low leveraged Saudi banks (not carrying the serious concerns prevalent with other international /regional financial institutions) are in a good position to harness future growth opportunities,” GIH said.
“Saudi banks’ equity to asset ratio, which has been above 13.5 per cent since 2008, is expected to reach 14.6 per cent by 2014, indicating a higher proportion of the total assets being financed by the equity base.”
The report said Saudi banks’ Tier 1 capital ratio above 11 per cent in 2010 remains well above the minimum requirement of four per cent under Basel II and six per cent under Basel III.
“Even during the times of severe global financial fears, Saudi banks kept their head high with Tier 1 capital ratio above eight per cent adequately meeting the requirements. As the banks globally took up the challenges of coping with various financial issues (including recapitalizing of balances sheets), the Saudi banks largely confident of their strong fundamentals are well placed to even handle any severe credit issues.”
The report showed a decline of around seven per cent in Saudi banks’ provisions, which had sharply risen since the global crisis and a severe debt default problems involving two Saudi family businesses.
“Provisions saw a decline of seven per cent in 2010. This is expected to be the start of the downhill journey from historically high levels,” it said.
“With increasing clarity of situation on both domestic and regional fronts, and relatively improved business confidence, we expect the banks to start easing the earlier aggressive stance of recording provisions. We expect provisions to decline by 33.1 per cent in 2011 and record a contraction of around 23 per cent through 2010-2014… additionally, the increase in NPL coverage to 115.4 per cent in 2010 is also somewhat comforting for the banks.”
Follow Emirates 24|7 on Google News.
