Saudi lenders remain wary of small firms

A surge in oil prices and heavy public spending have failed to spur Saudi banks into easing their credit tightness as they are still cautious about lending to small companies and family businesses, a major Saudi bank said yesterday.

While the size of loans provided by the kingdom's 12 commercial banks does not match the pace of recovery in the domestic economy, credit growth could pick up towards the end of the year, propelled by financing needs for major projects worth more than $120 billion (Dh440bn, SR444bn), Banque Saudi Fransi (BSF) said in a study sent to Emirates Business.

"Improvements in Saudi Arabia's economic outlook have been set into motion by sizeable government spending outlays, but bank lending has yet to take a consequential role in shoring up the recovery process," BSF said.

It said commercial banks are still lagging behind in considerably enlarging their credit portfolios, even as business confidence improves, oil prices remain high and banks' liquidity positions continue to look very robust.

A factor hindering credit recovery is the project finance pipeline which, although vast in size and scope, is unlikely to yield many large-scale lending prospects for banks until year-end and 2011, leaving little room for catalysts to energise loan growth in a meaningful way this year, the report said.

It noted that the Saudi Government continues to shoulder the recovery by providing cost-advantageous loans to expedite major infrastructure projects in the short term, in some ways shunning higher borrowing costs of conventional financing to keep its strategy on course.

"A scenario of some concern has emerged for banks, which are not being sufficiently roped in to taking part in such low-risk strategic lending opportunities. Hesitant about extending loans to smaller firms lacking established track records of credit worthiness, banks are also vetting with greater caution loan requests of longstanding family businesses as they rethink relationship lending policies after debt troubles surfaced among two such conglomerates in 2009," BSF said.

"The medium-term project financing outlook for banks remains robust despite ConocoPhillips pulling out of a giant Yanbu refinery project with Saudi Aramco this quarter just as the state oil giant and Dow Chemical revealed plans to overhaul a petrochemical project at Ras Tanura."

Saudi banks were among regional lenders hit by exposure to local defaulters Saad and Algosaibi family conglomerates. The problem, coinciding with the global economic downturn, has forced most banks in the area to tighten their lending belts and build up large provisions. Saudi banks, which control the second largest asset base in the Arab World after the UAE banks, are believed to have allocated over SR10bn in loan loss provisions while their credit to the private sector has remained minimal.

BSF's projections showed bank lending to the private sector could expand by eight per cent in 2010 so long as a few large financing deals reach fruition this year. It noted that some banks have started to lend more aggressively, including National Commercial Bank, Riyad Bank and Sabb, "possibly compelling others to follow suit in order to retain market share".

According to the report, a group including Riyad, Samba Financial Group and Arab National Bank are expected this month to close SR14.5bn syndicated loan for Saudi Binladin Group to fund construction of the King Abdullah Financial District. As banks also build their retail loan books, this will bode positively on their performance in the coming months, it said.

"Towards the end of the year and in 2011-2012, private sector credit growth potential will brighten further… according to our estimates, more than $120bn worth of projects will need to be financed through to 2012, with more than 60 per cent of this taking place in 2011."

"Taking robust economic fundamentals in the kingdom into consideration, stagnancy in bank credit is not commensurate to the size of local banks, their liquidity and the macroeconomic well being of the country." BSF said it believes that unlike other Gulf states where banks continue to suffer the consequences of sharp property market corrections and corporate defaults, Saudi Arabia has fared very well.

"Its property market is undersupplied, prices are resilient and home finance accounted for only 2.6 per cent of total loans as of March. Private firms have de-leveraged and, unless there is a drastic shift in global circumstances, there should be no new large skeletons of bad debt hiding in the closet."

It added that the government, through credit agencies such as the Public Investment Fund and the Saudi Industrial Development Fund, has offered generous financial support to keep key infrastructure projects on track.

Citing figures by the Saudi Arabian Monetary Agency, the report said that by the end of March, the value of these independent organisations stood at SR585.29bn, down 7.3 per cent from 2008.

"Expansionary spending should, in theory, boost confidence of private sector investors in the economy and catalyse bank credit. But despite all of the ingredients for a perfect recipe of bank credit revival appearing to be in place, lending continues to be listless," the report said.

"Typical reasons given for languishing bank credit growth are: 1) banks are implementing tighter conditions on relationship lending; and 2) private-sector companies are not seeking loans as they focus instead on reducing their debt positions…. these two reasons tell part of the story, but they omit two additional crucial components outside of banks' control."

According to BSF, state intervention with interest-free financing, while advancing official development ambitions, fails to persuade banks to jumpstart lending as the state is leaving little room for banks to partake in strategic projects in sectors such as utilities and transport.

"It may be prudent to reassess the state's business model to strike better balances between government involvement and private sector participation on the one hand, and interest free lending and more costly bank credit on the other. In the medium term, the economic costs of failing to involve banks will outweigh any savings in financing," the report said.

"The government should avoid creating a scenario where it is forced to carry the burden for economic development by crowding out most private participants in favour of a select few. Participation of mid-segment companies, including contracting firms, should be emphasised, while efforts made to achieve local content sourcing."

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