Saudi bank loans and deposits to remain tight

Saudi banks are expected to suffer from a slowdown in deposit and lending growth in 2009 because of weaker performance by domestic companies and a more cautious credit policy, a key Saudi bank said yesterday.

Growth in deposits with the Kingdom's 12 commercial banks has already slackened while lending is losing momentum as domestic demand weakens and most banks are focusing on large companies, the Saudi American Bank Group (Samba) said in its latest monthly bulletin.

Citing January figures by the Saudi Arabia Monetary Agency (Sama), it said loan growth had slowed to around 20 per cent from a mid-2008 peak of nearly 33 per cent. The decline in deposit growth has been more gradual, with January growth at around 14 per cent, down from 22 per cent in mid-2008.

The study considered the slowdown as largely reflecting developments in the corporate sector, where the earnings outlook has dimmed in the face of softening domestic and global demand.

It noted that weaker corporate profits have had a decisive bearing on overall deposit growth, offsetting a pick-up in consumer deposits as Saudis retreat from equity investments and seek the relative safety of cash.

The study found that lending growth has also softened, adding that corporate lending is still proceeding, but banks are tending to focus on major infrastructure projects in key sectors, often involving only blue chip firms.

"Looking ahead, we expect both deposit and lending growth to continue weakening this year. Deposit growth will continue to sag given the subdued outlook for corporate profitability; lending – which tends to overshoot deposit growth on both the way up and the way down – will be dampened by reduced corporate demand, weak oil prices, to which it has become quite closely correlated, and banks' desire to move well below the mandated loan-deposit ratio limit of 85 per cent," Samba said.

"A modest pickup in lending growth is anticipated for 2010, predicated on an improvement in corporate prospects and a partial return of international banks to the Saudi corporate debt market."

Saudi banks are already reeling under the global financial crisis as most of them reported lower earnings in the fourth quarter of 2008.

The decline depressed the total net profits for 2008 by nearly 12.8 per cent to around SR26.3 billion from SR30.2bn in 2007.

According to the Saudi British bank (Saab), banks in the Kingdom have sufficient liquidity to meet domestic demand for credit but they are adopting a tight lending policy following a sharp growth over the past year.

"We think that the debate about banks' liquidity should be refocused. Liquidity in the strict sense for a bank is its ability to meet its financial obligations as they come due," it said.

"We think that banks are liquid in that sense and far more liquid than many regional banking systems. While banks can not lend ad infinitum, we believe that there are some interrelated trends unfolding in the banking system."

It said they include the fact that banks are now more risk averse, want to observe the private sector's ability to meet its obligations, and a decline in the private sector's borrowing appetite because of the gloomy economic climate.

"We are not of the opinion that banks are failing to lend because banks have run out of money. This is the false assumption and a misinformed one. Price stickiness in funding is an issue that private-sector actors express in our meetings with them," Saab said.

"We think that sustaining loan growth and appetite in 2009 at the pace of 2008 will not be possible, given that the risk matrix has changed for both borrowers and lenders alike. Lending appetite could be winding down as banks become liquid. We notice that businesses continue to be less optimistic about the lending attitude of banks in the Kingdom."

  

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