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Liquidity pressures among Saudi banks ‘are easing’

Moody’s expect banks’ credit growth to moderate and pressures on Saudi Interbank Offered Rate to ease further

Published: Updated:

Liquidity pressures among Saudi banks are easing after the past two years of deposit outflows and increased funding costs as a result of falling oil prices and associated government revenues, Moody’s Investors Service said in its latest sector comment.

Easing cash flow pressures in the private sector will also help as the government settles outstanding bills with contractors issuance to flow into local banks either directly, through public-sector deposits, or indirectly in the form of corporate deposits.

Moody’s expect banks’ credit growth to moderate and pressures on Saudi Interbank Offered Rate (SAIBOR) to ease further owing to a number of factors.

One factor is lower volumes of domestic government bond issuances following the success of the external bond issuance, which will limit competition for available liquidity in the banking system.

Lower loan growth

Another factor is traditionally lower loan growth in the second half of the year because of seasonal factors (loan growth contracted 1 percent quarter on quarter during third-quarter 2016), and our expectation of a further slowdown to 3 percent to 5 percent growth next year.

On Monday, the SAIBOR fell to 2.19 percent from 2.39 percent three weeks earlier to reach its lowest level since June 2016 and reverse the upward trend of the past 12 months.

The SAIBOR’s decline is credit positive because it indicates that liquidity pressures among Saudi banks are easing after the past two years of deposit outflows and increased funding costs as a result of falling oil prices and associated government revenues.

It is expected that the decline in three-month SAIBOR, a gauge of domestic funding conditions and a benchmark for lending rates, will reduce banks’ funding costs.

Over the past year, the benchmark rate surged to 2.4 percent in October, its highest level since January 2009, from 0.9 percent a year earlier, amid a tightening liquidity environment. As a result, the average cost of funding for local banks more than doubled to 0.85 per cent for the first nine months of 2016 from 0.4 percent in the first half of 2015. However, net interest margins and bottom-line profitability have not been affected, with banks’ return on assets unchanged at 2.0 percent as of third-quarter 2016.

The SAIBOR decline, including a steep 2.9-basis-point drop on November 2, follows Saudi Arabia’s $17.5 billion international sovereign bond issuance on October 19. Some of the proceeds from that issuance will flow into local banks either directly, through public-sector deposits, or indirectly in the form of corporate deposits.

Clearing delayed payments

The government recently announced that it aims in the coming months to clear delayed payments to Saudi contractors that have accumulated since 2015.

Earlier this year, the central bank deployed various monetary instruments to alleviate banks’ liquidity challenges.

Those moves included increasing the maximum allowable loan-to-deposit ratio to 90 percent from 85 percent, successive deposit injections totaling 32 billion Saudi riyal, and introducing seven-day, 28-day and 90-day repurchase agreements with the Saudi Arabian Monetary Agency.

Since the fall in oil prices, Saudi banks’ deposit growth has been subdued owing to government spending cuts and slowing economic growth, as shown by a 2 percent year-on-year decline in total banking deposits as of September 2016, versus a 12 percent compound annual growth rate during 2011-14.

At the same time, total banking credit grew rapidly, rising 7 percent in September 2016 from a year earlier. Both trends resulted in a significant rise in banks’ net loan-to-deposit ratio to 86 per cent as of September 2016 from 77 percent as of year-end 2014.

This report was first published in Saudi Gazette on November 20, 2016