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02 December 2023

Saudi banks keep lending coffers tight

By Nadim Kawach

Saudi Arabia’s banks appear to have shunned growing signs of economic recovery and kept their lending coffers squeezed, pushing the loan-to-deposit ratio in November to its lowest level in 2010, according to a Saudi bank.

Claims on the private sector declined in November as the sector is also playing a role in stifling credit activity in the world’s dominant oil power given the cautious attitude it has adopted since the onset of the 2008 global fiscal crisis.

“The Saudi banking system’s loan-to-deposit ratio stood at its lowest level in 11 months in November as deposits grew but bank lending to the private sector made another languid performance, falling from the month earlier,” Banque Saudi Fransi (BSF) said in a study sent to Emirates 24/7.

Citing official data, it said claims on the private sector declined 0.2 per cent between October and November while the annual growth rate dropped from 4.1 per cent to 3.7 per cent due to lower outstanding short- and medium-term loans.

While monetary conditions continue to lag, high oil prices have supported a rebound in net foreign assets to pre-2009 levels and offer a prime backdrop for a broader recovery this year, BSF’s chief economist John Sfakiankis said.

“The long-winded revival in bank lending has been a key hurdle before an economic turnaround in the kingdom. Fiscally, the country is sound, with government estimates last month indicating a 2010 surplus of SR108.5 billion, linked to a good rebound in average oil price last year to nearly $80,” he said.

“Domestically, however, private sector business caution continued to prevail throughout the year….while non-oil private sector GDP growth did rise to 3.7 per cent in 2010 from 3.5 per cent in 2009, growth came below our forecasts. The government sector, meanwhile, picked up the slack, with its GDP growth jumping to a 13-year high of about 5.9 per cent.”

The report said reluctance by companies to invest their capital into new projects and of banks toward lending has resulted in a fragile recovery in bank credit. Stripping out investments in private securities, bank credit growth to the private sector stood at just 2.6 per cent in November against three per cent in October.

Growth in loans to public sector enterprises also declined in November to an annual 8.9 per cent from 12.6 per cent in October and nearly18 per cent in September, according to BSF, one of the largest Saudi banks.

The report showed that a loan-to-deposit ratio of 80.27 per cent in November represented the lowest since December 2009.

It said deposit growth has been slow over all for 2010, growing just 2.6 per cent in the first 11 months. By comparison, deposit growth was 11.2 per cent in 2009 and as high as 17.9 per cent in 2008.

“Still, deposits held in banks advanced 2.1 per cent in November from the month earlier, resulting mainly from greater interest in demand deposits, which have been favoured through 2010 due to their accessibility and the low interest rates paid on time and savings deposits,” the report said.

“While funds held in demand deposits climbed 24.2 per cent in the year to November, the amount of savings deposits dropped 15.1per cent. Time and savings deposits, however, rose 2.4 per cent in November from October.”

BSF noted that the growth in deposits gave a boost to broad money supply (M3), which grew almost two per cent in November to SR1.06 trillion.

M2 money supply better reflected growth in demand and time and savings deposits, growing six per cent year-on-year.

The figures showed M2 growth rates fell in October and November after reaching a 10-month high of eight per cent in September.

They also showed Saudi banks’ combined foreign assets swelled by around 14.5 per cent in November while their holdings in the central bank’s reverse repo window jumped almost 28 per cent from October.

“This once again highlights the abundance of liquidity in the banking system. Lending growth is likely to continue this year, although a return to doubled-digit rates of private sector loan growth is unlikely before 2012,” the report said.

“Our forecast for growth in claims on the private sector in 2011 is nearly 9.3 per cent, with long-term lending toward expansion projects in the Kingdom likely steering the growth….. improving lending is the key to building the banking sector’s profitability in the coming years.