Saudi banks in strong position to fund loan growth

Saudi Arabian banks have plenty of scope to fund loan growth in 2012 as the sector relaxes the cautious approach to lending that has dominated in the last few years, Fitch Ratings said.

Rising deposits and several years of subdued loan growth have allowed Saudi banks to build up substantial surplus liquidity in the form of government securities and deposits with the Saudi Arabian Monetary Agency (Sama).

“We believe this will enable the sector to sustain lending growth that has risen in the last few months. This growth is likely to be at a reasonable pace and therefore should not hurt asset quality or banks' viability ratings,” said Philip Smith, Senior Director, Financial Institutions, Fitch.

Funding is a key strength for Saudi banks, where deposits constitute around 89 per cent of non-equity funding at Fitch-rated banks. However, sector deposits are concentrated on either direct government deposits or deposits from government-related corporates. Retail deposits do form the majority of funding at some banks and are a strength in the sector because of the country's high savings rate. Capital levels are generally good and can support loan growth, despite relatively high dividend payouts.

The Saudi banks have taken a cautious approach to lending since 2009, due to the collapse of the Saad and Al Gosaibi family-owned groups and as a response to the global financial crisis. Therefore, deposits have to a large extent been placed with other banks.

“We believe the increase in lending seen in recent months is a sign of rising confidence among Saudi banks, but that they are not relaxing lending standards too far. In any case, lending to established companies in Saudi Arabia is relatively safe in comparison to other countries given the benefits they enjoy from government-sponsored projects. Growth is likely to continue as major government expenditure in areas such as housing, education and economic development creates more demand for credit from contractors and suppliers.”

The high proportion of deposits in funding results in low funding costs for most banks, particularly because the Islamic banking model means a significant proportion of deposits are unremunerated. However, it also means that there can be a particularly large maturity mismatch between short-dated deposits and long-dated loans.

“We expect much of the growth in 2012 to come from project-related finance, which would exacerbate this mismatch, as well as lending to personal customers and SMEs. However both sides of the balance sheet are largely tied into government sponsorship, and deposits have been sticky in the past, which mitigates concern over the mismatch,” Smith said.

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