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Saudi cbank raises loan-to-deposit ratio

RIYADH, February 22, 2016

The Saudi Arabia Central Bank (Sama) recently raised banks’ maximum allowable loan-to deposit (LTD) ratio to 90 per cent from 85 per cent, which will allow banks to continue expanding credit while limiting price competition for deposits.

It will also reduce their need to use expensive long-term borrowing (included in the LTD definition from Sama), which supports banks’ profit.

However, this measure is credit negative because it relaxes an important safeguard in the conservative prudential framework that we consider strength of the Saudi banking system, according to a Moody’s Investor Service report.

The actual LTD ratio increased in December 2015 to 81 per cent from 76 per cent in 2014. Saudi credit growth remained elevated at around 8 per cent in 2015 (but down from 12 per cent in 2014), supported by high government spending.

However, public-sector deposits placed with banks declined (primarily because of lower oil revenues) and drove an overall slowdown of net deposit inflows to around 1 per cent, down from 12 per cent in 2014, said Moody’s.

“We noted in January that slowing deposit growth is credit negative for Saudi Banks, and said that the 85 per cent cap on the banks’ LTD ratio would likely amplify liquidity tightening in the Saudi economy by limiting banks’ credit,” the report said.

“Deposits are Saudi banks’ primary source of funding and accounted for 78 per cent of total assets and 90 per cent of non-equity funding as of December 2015. Funding via long-term borrowing has historically been very limited in Saudi Arabia (i.e., a maximum 2 per cent of total funding in past five years) given the abundance of non-interest-bearing deposit flows.

“This year, we expect banks’ funding to be constrained by muted deposit growth. Therefore, the solution for some banks to fund credit growth this year under an 85 per cent LTD ratio constraint would have been to compete for fixed deposits on price and to raise long-term borrowing,” Moody’s added.

Sama’s increase of the maximum allowable LTD ratio to 90 per cent will therefore allow some banks to continue expanding their loan portfolio and top-line revenues.

By reducing banks’ need to raise more fixed deposits and long-term borrowing, it will also moderate the negative effect that tightening liquidity and rising interest rates are having on Saudi banks’ cost of funding: three-month SAIBOR rose to 1.7 per cent in February 2016, its highest in seven years, the report said.

Sama’s action, which is intended to induce credit-fuelled economic growth, comes amid weakening fundamentals.

Moody’s expects prolonged low oil prices (i.e., Brent averaging $33 per barrel in 2016 and $38 in 2017) and lower government spending to negatively affect loan performance, increasing nonperforming loans to 2.5 per cent this year from 1.4 per cent as of September 2015.

“We expect the relaxed LTD ratio will further expose banks to funding volatility, which stems from high deposit concentrations. In this context, although we expect loan growth to moderate to around 5 per cent in 2016, softer regulation on banks’ funding will widen the gap between credit and deposit growth,” the report said.

The implementation of Sama’s conservative prudential framework has allowed Saudi banks to build very high funding and liquidity metrics in recent years. The Saudi banks’ current 81 per cent LTD ratio compares favourably with the 89 per cent average for GCC banks and 93 per cent for global peers with an a3 baseline credit assessment.

“Besides, Saudi banks have already implemented Basel III standards and we estimate their December2015 liquidity coverage ratio at 200 per cent and net stable funding ratio at 130 per cent -- both very high levels,” Moody’s said.

“Although Sama’s LTD increase will not challenge those metrics, banks may become less selective about loan growth, gradually eroding their liquidity buffers and funding stability.” – TradeArabia News Service




Tags: Saudi Arabia | Central Bank | Sama | Moody’s |

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