The month of May witnessed a continuation in the expansion of credit in Saudi Arabia despite dwindling deposits; the primary source of funding in Saudi banks.
Total claims of Saudi banks, excluding government bonds, stood at SR1.43 trillion, surging over last year by 9.5 percent. On the other hand, deposits marked the fourth consecutive annualized decline, sliding by 3.4 percent, according to a report by the National Commercial Bank.
Deposits account for 70.9 percent of total bank liabilities, and since Saudi banks adopt a conventional credit model, the capacity to lend is directly linked to the inflow of deposits.
Demand deposits which make up over half the money supply (56 percent by May) have dwindled 9 percent Y/Y due to lower oil revenue. In contrast, the propensity to save had increased as evident by the rise of time and savings deposits by 9.7 percent annually. Quasi monetary deposits inched up by 2.7 percent Y/ Y, mainly due to rising letters of credit by 50.7 percent Y/Y, the NCB report said.
On the asset side, the annual growth in private sector credit was at 9.7 percent, displaying resilient credit demand despite the liquidity squeeze. The surge in credit in May was induced by an added capacity for lending allowed by Saudi Arabian Monetary Agency (SAMA). The maximum allowable loan-to-deposit ratio (L/D) rose from 85 percent to 90 percent providing a momentum boost. On the flip side, with private credit falling back to the single digit in just three months. This could be indicative of deceleration, especially that the consolidated L/D ratio for Saudi banks as of May already stands at 89.9 percent.
Credit-induced growth will be a highlight for the coming years as the Kingdom seeks to finance its spending gap via the issuance of government bonds. By the end of May, government bond issuances show a surge of 191.8 percent Y/Y, standing at SR153.5 billion. On the other hand, treasury bill holdings in Saudi banks have declined by 73.2 percent to SR61.2 billion in order to free up liquidity for the longer maturity issuances.
Annualized growth in credit to public sector enterprises turned positive for the second month following twelve months of decline. In search of new revenue streams, the government’s National Transformation Program aims to boost non-oil revenue to SR530 billion via the introduction of value-added taxes, the utilization of untapped resources such as mining and tourism, in addition to large-scale privatization. Efficiency measures will also be implemented as the government optimizes spending which would have a positive long-term effect.
The composition of bank credit by maturity reveals 51.4 percent in short-term periods, valued at SR734.4 billion.
Medium-term credit accounts for 19.3 percent at SR276.3 billion, while long-term credit accounts for 29.3 percent, standing at SR418.8 billion. By annual comparison, short-term loans rose 11.3 percent Y/Y, while medium and long-term loans surged by 19 percent Y/Y and 9.5 percent Y/Y, respectively.
The 3-month Saudi Interbank Offered Rate currently stands at 2.2 percent, rising above SAMA’s repo rate of 2 percent. Thus, we note a substantial activity pick-up in repo transactions, reaching SR3.6 billion in May, as banks borrow against their holdings with SAMA amid liquidity shortage in the interbank market.

Source: Arab News