Weak demand curbs Saudi lending

Saudi bank credit has remained muted mainly because of weak demand for loans by local companies in contrast with a lending boom before the eruption of the 2008 global fiscal distress, a key Saudi bank has said.

But lending is projected to pick up in the next two years as banks build up liquidity and domestic firms resume investment programmes they have put on hold because of the crisis, the Saudi American Bank Group (SAMBA) said.

Citing figures by the Saudi Arabian Monetary Agency (SAMA), the Gulf Kingdom’s central bank, SAMBA said growth in lending to the private sector eased in August year-on year though the month-on-month gain was also weak.

SAMA’s figures showed growth in bank credit to the private sector fell back to 3.3 per cent in August from 4.9 per cent in July.

Base effects appear to have played a part—there was an unexpected surge in lending in August 2009—but the monthly addition was also weak, SAMBA said in its quarterly economic bulletin, released on Thursday.

It said this in turn may partly reflect the summer lull, but overall bank lending has not been as strong as many had thought or hoped it might be in 2010.

“Banks spent much of 2009 engaged in portfolio reviews, ensuring that their existing clients were not under stress, particularly following the default of two major family conglomerates in mid-year. Having satisfied themselves that there were unlikely to be any further corporate disruptions, banks began to grow their loan books again in 2010,” the study said.

“That growth has been weak is partly explained by a lack of demand. Many Saudi firms—the majority of which are family-owned—have made little in the way of capital investments this year, and have instead been focusing on reinforcing their balance sheets. Demand for fresh capital has therefore been muted.”

SAMBA said it believes lending would gain momentum in the next two years on expectations Saudi companies would boost capital spending and local banks have accumulated sufficient liquidity to meet credit needs.

“Looking ahead, we expect lending growth to gather pace over the next two years as public sector projects continue to be rolled out and as private firms spend more on capital investment,” the report said.

“Banks have already begun to build their deposits in readiness for what is likely to be a period of strong credit growth. We expect lending growth ---to public and private sectors-- to reach just under eight per cent this year, and to accelerate to over 19 per cent in 2011 as the private sector recovery gains traction.”

SAMBA projected lending growth in the largest Arab economy to be reined back from mid-2012 onwards as the average loan-deposit ratio edges up towards 90. “We will see a somewhat calmer—but still robust—period of lending growth in 2012-2013, averaging around 17 per cent…...deposit growth should be supported by a firm pickup in corporate profits, and this will allow the end-2013 loan-to-deposit ratio to ease to around 85 by end-2013.”

According to the study, lending by Saudi Arabia’s 12 commercial banks has been vigorous in certain segments, including the construction sector.

“First, lending to contractors has been stepped up. The public sector construction surge has been a boon to contractors, particularly as the authorities have shifted away from Public- Private Partnership (PPP) and Build-Own-Transfer (BOT) financing/construction models towards traditional public financing,” it said.

“Payment delays for contractors have narrowed significantly over the past decade, and now tend to be only 60- 90 days… nevertheless, this still creates room for bank finance and as contractors’ prospects have improved so banks have stepped in to provide bridging loans and capital to contracting firms.”

The report said bank credit to local cement and steel companies has also increased, noting that steel importers in particular were badly caught out by their decision to build up large inventories during 2008 when regional prices were soaring, only to see prices collapse in the final months of the year—a slump that put considerable strain on their balance sheets.

Nevertheless, prices have since staged a partial recovery, and with the public sector’s construction push underpinning domestic demand, steel importers’ prospects are now much brighter, it added.

“Finally, project finance continues to thrive. Banks are still careful to differentiate between project sponsors, and a clear dichotomy persists between public and private projects,” it said, referring to the imminent $7.5-billion financing deal for Maaden, a joint public-private sector venture.

“Elsewhere, private consumption appears to be expanding at a strong pace. Points of sale transactions, which account for roughly 20 per cent of retail activity, increased by 31 per cent in value terms in the 12 months to August.”

The study said spending has been boosted by higher wages and subsidies, set against a backdrop of high and unusually steady oil prices.

Private sector import spending, as depicted by the value of new letters of credit, soared by 42 per cent over the same period, the report showed.

“Import spending has been volatile however, reflecting price movements more than volumes. Overall volume growth has trended down during the year, though it is still up significantly on 2009, nearly nine per cent in September.”

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