Saudi banks’ liquidity comfortable in spite of outflows, says Fitch

Despite a 30 per cent outflow of government-related deposits from the banking sector since oil prices declined sharply in November 2014, major Saudi banks continue to report liquidity coverage ratios (LCRs) above 100 per cent despite, according to Fitch Ratings report released on Monday.

The banks’ ability to withstand such a shock demonstrates that their liquidity positions, at least in the short term, are resilient. LCRs measure a bank’s stock of qualifying liquid assets over its short-term potential liquidity needs over a 30-day horizon.

The pace of withdrawals, already slowing, will likely ease further as government debt issuance rises, the report says.

“However, we believe the Saudi government will continue to withdraw deposits from the banking sector to shore up its finances. Nevertheless, one-off measures can help release government-related deposits back into the banking sector to stabilise liquidity given the authorities’ supportive nature,” says Fitch Ratings.

The Saudi Arabian Monetary Agency (SAMA) released $5.3 billion (20 billion Saudi riyals) of government-related deposits into the banking sector yesterday, according to media reports.

One of SAMA’s functions is to ‘deal with the banking affairs of the government’ and, as such, it holds substantial government funds. Government-related deposits are an important source of funding for the sector and feature prominently among the banks’ largest depositors, exposing the banks to concentration risks.

Saudi banks rely heavily on deposits for funding, with customer deposits representing 93 per cent of total non-equity funding in the sector at end-2015. Two-thirds of deposits are non-remunerated, meaning that banks fund themselves very cheaply. This is especially true for banks with particularly strong franchises - such as retail leader Al Rajhi Bank and National Commercial Bank (NCB) where non-remunerated deposits represent, respectively, 99 per cent and 82 per cent of total deposits.

The cost of interbank deposits, meanwhile, has risen sharply given tighter liquidity in the sector.

LCRs for major Saudi banks, with the exception of NCB, fell sharply in the year to end-June 2016, albeit from very high levels.

Careful management

According to Fitch Ratings, Saudi banks will continue to adopt careful liquidity management strategies in order to protect their LCRs from falling below current levels, while making sure the mix of liquid assets helps minimize fluctuations and optimises returns.

The drop in the banks’ LCRs has been partially offset by banks reallocating government bonds into higher-yielding interbank placements maturing within 30 days as 100 per cent of the value of these can be used to offset outflows under the LCR calculations.

Saudi Arabian banks began reporting LCRs in 2015, and the Basel Committee considers implementation in the country to be “largely compliant” with its guidelines.