Saudi banks shun private sector to invest abroad

Saudi Arabian banks are still avoiding lending to the private sector as part of their post-crisis risk-aversion policy that is prompting them to amass their investment in the local public sector and abroad, a key bank in the Gulf kingdom said yesterday.

The 12 commercial banks in the world's oil powerhouse pumped record funds into the global financial system in 2009 and their drive picked up in the first few months of 2010 as domestic credit remains at one of its lowest levels, Banque Saudi Fransi (BSF) said in a study sent to Emirates Business.

Besides investing abroad, banks lavished credit to the less-risky government and other public institutions during that period to offset their tightness towards the private sector, with their claims on the public sector swelling by around 13.1 per cent between December 2009 and April 2010.

"A tendency towards risk aversion is likely to continue as banks vet loan requests "other than those linked to the government's strategic infrastructure projects" with caution. Claims on the public sector declined in May but there has been an upward trend since December which could represent a gradual step away from the state self-funding its own projects," BSF's Chief Economist John Sfakianakis said in the bank's monthly monetary indicators for Saudi Arabia.

He said the small drop in May can also represent the government's repayment of its outstanding loans, adding that the Saudi Arabian Monetary Agency (Sama) has upheld a policy of keeping its reverse repurchase rate at 0.25 per cent in a bid to encourage banks to lend their surplus funds. "But risk-averse banks have tended to park their cash abroad instead. Between January and May, banks' net foreign assets climbed 23.5 per cent to SR104.94 billion (Dh102.79bn), after surging 36.9 per cent in 2009," Sfakianakis said.

The report showed Saudi bank deposits, the second largest in the Arab World after those of the UAE banks, held in Sama's reverse repo window declined 17.9 per cent year-on-year in May, following similar drops in March and April.

"This could indicate that banks are deploying more funds in the domestic economy while also searching for investment opportunities outside," it said.

"Banks have not aggressively striven to build up deposits recently because they have ample liquidity and are not lending aggressively. The loan-to-deposit ratio, which had fallen as low as 77 per cent in December, stood at 78.6 per cent in May, down slightly from April's 79 per cent." Sama's figures showed banks' claims on the public sector surged to SR206bn at the end of April from SR182bn before slipping to SR202bn at the end of May.

In contrast, claims on the private sector grew by only around 2.1 per cent from SR734bn at the end of 2009 to SR750bn at the end of April. They edged up to SR753bn in May.

The figures showed the banks' foreign assets gained around SR5bn to climb to a record high SR215.8bn at the end of April before dropping to about SR208.1bn at the end of May. The assets stood at SR153bn at the end of 2008.

According to the Saudi American Bank Group (Samba), the surge in foreign investments was a result of a drive by Saudi banks to invest in high-return US securities and their tightening local credit policy. It noted that such a trend was strengthened by weakening investors' confidence last year.

"Many banks have opted to channel surpluses towards higher-yielding foreign securities. The continued weakness in lending growth comes despite fresh measures by the authorities to stimulate lending," Samba said.

"Looking ahead, we expect this caution to remain in place at least until the second half of 2010. There is no sign yet of foreign banks returning in great numbers to the Saudi corporate debt scene. International lenders await resolution of the two Saudi debt situation. For these reasons, we think lending growth will remain flat at least for the next six months," it said.

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