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Saudi banks face liquidity pressures as economy grows

Architecture, Building, Office Building Reuters/Ahmed Yosri
Saudi banks’ loan books grew by 0.9% month-on-month to SR2.39trn in February 2023
  • Sama central bank may provide more funding for commercial lenders
  • Concerns about a slowdown in credit growth are increasing
  • Building activity in the kingdom is the highest in the world

The Saudi central bank may step in to provide funding to local banks for the second time in a year to ease liquidity pressures and keep the economy growing, analysts have said. 

Last June central bank Sama placed about SR50 billion ($13 billion) as time deposits with commercial lenders in a bid to ease the worst liquidity squeeze since late 2008, when the price of crude oil slumped below $40 a barrel.

James Swanston, Mena economist at Capital Economics, told AGBI that Sama could pump deposits into the local banking sector again. 

“They made a similar move last year,” said Swanston. “We have noted that if the government and/or Sama are worried about a slowdown in credit growth then they would have to continue to provide liquidity.” 

Oil prices are buoyant but rising interest rates feeding into higher funding costs, combined with the lure of lucrative giga-projects, are stretching Saudi financial institutions. 

Liquidity, as measured by a bank’s loans to deposits ratio, tightened in 2022 as loan growth outpaced deposit growth at 15 percent versus 9 percent. Banks are finding it difficult to resist the wealth of lending opportunities associated with the kingdom’s Vision 2030.

Building activity in Saudi Arabia was the highest in the world in the final quarter of 2022, according to the Royal Institution of Chartered Surveyors.

Increased demand for credit has persisted into 2023. Saudi banks’ loan books grew by 0.9 percent month-on-month to SR2.39 trillion in February 2023, taking the overall loan-to-deposit ratio to 83 percent, according to Sama. 

In the case of some banks, it is even higher. Saudi National Bank’s ratio stood at 96 percent at the end of 2022, it emerged during the Credit Suisse crisis. 

The tightening has been compounded as depositors have moved funds from interest-free accounts into term deposits to take advantage of rising interest rates. The ratio of non-interest deposits to total deposits fell to 57 percent at the end of 2022, from 65 percent at the end of 2020. 

This means the cost of funding of Saudi banks increased to 110 basis points in 2022 – almost a threefold increase from 40 in 2021, according to ratings agency S&P. 

Mohamed Damak, senior director at S&P Global Ratings, told AGBI: “If that injection of deposits is needed again, we think that Sama will do it again.” 

The financing gap also provides an opportunity for overseas banks to step in and secure lucrative business.

Damak told a conference last month that Saudi banks will continue to “grow tremendously” but that the size of the funding needed to achieve the kingdom’s goals is so large that there’s opportunity for new lenders to come in.

“We’re seeing more and more interest from the international banks and also the regional banks to go to Saudi Arabia and take part in the different projects and the huge financing needs,” Damak said.

“The Saudi banks won’t be able to cater to all the needs coming from Saudi Vision 2030 … Not so much because the banks are not well capitalised or because the banks do not have enough space, but it’s from a liquidity perspective.”

Asad Ahmed, managing director at Alvarez & Marsal, a professional services group, told AGBI: “I don’t see any constraints per se on Sama injecting more liquidity but my personal view is that banks will need to address their respective liquidity management functions in a more focused way as a starting point.”

Anton Lopatin, senior director at Fitch Ratings, said it expects the Saudi banking sector’s average lending growth to slow to around 12 percent in 2023, down from 15 percent in 2022. 

“Saudi banks are funded mainly locally, and we were observing increasing competition for deposits in the rising interest rates environment in 2022,” he said. 

Saudi banks’ average net interest margin remained healthy at 3.2 percent last year but Lopatin pointed out that competition for local deposits is to remain high in 2023.