Saudi mortgage law is credit positive for banks :Moody’s

Law will enhance asset growth potential, strengthen the profitability of retail franchises

Saudi Arabia’s approval of the long-awaited mortgage law last week is credit positive for its banks as it will spur lending for housing and support their asset base, according to Moody’s investor service.

“The implementation of the mortgage laws is credit positive for Saudi banks because we expect it to enhance their asset growth potential, strengthen the profitability of retail franchises and increase loan book diversification,” the rating agency said in a report on the landmark mortgage law in the Gulf Kingdom.

It cited Saud government figures showing housing loans currently constitute around three per cent of banks’ loan portfolio, which is heavily dominated by low yielding corporate and government business.

Housing loans account for around two per cent of Saudi Arabia’s GDP, compared with nearly 5-10 per cent of GDP in most other Gulf Cooperation Council (GCC) countries, according to the respective central banks and Moody’s estimates.

“We expect that the implementation of the new laws, in conjunction with pent-up demand and the government’s supply-side initiatives for social housing, will create a sizable new asset class for banks,” the report said.

“In addition, we also expect the government-owned real estate development fund (REDF) to cooperate with banks in granting mortgage loans, possibly by providing partial guarantees on the mortgages and by subsidizing rates. All these factors will significantly strengthen Saudi Arabian banks’ retail franchises within the next five years.”

Moody’s also expected the increased focus on retail lending to improve special commission margins, profitability, and the granularity of loan portfolios through a larger number of relatively smaller loans.

It quoted figures by the Saudi Arabian Monetary Agency (SAMA) as showing the Kingdom’s loan books are heavily geared toward low yielding and bulky corporate and government lending, accounting for 73 per cent of total loans at end March 2012.

“However, the growth in mortgage loans will likely be gradual, as we expect Saudi Arabia’s conservatively supervised banks to exercise caution and continue relying on strict affordability and underwriting criteria, in addition to the usual salary assignment taken by the lender, especially until the foreclosure process is tested in the courts,” Moody’s said.

“Under the laws, mortgages will be based on a finance-lease concept, which effectively means that the ownership remains with the bank during the lease period, which will assist foreclosure enforcement. Further, a new court will handle disputes related to real estate finance and foreclosed properties will be sold through an auction system.”