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Banks in Saudi Still Adverse to Risk In the Face of Recovery

Saudi Arabia : 08 October 2010

August lending rates slower at a dozen commercial banks, due to lessened movement during Ramadan.

The banks in Saudi Arabia are still adverse to risk even though a local economic recovery is staring them in the face, according to a leading Saudi bank.  There is also increased public spending on the backs of higher oil prices.

The kingdom’s 12 commercial banking establishments experienced slower lending during August, as a result of the low level movement during the holy month of Ramadan.  The Banque Saudi Fransi (or BSF) also stated that demand for credit in the private sector remains weak.

The slower lending developed alongside a sharp drop in bank deposits, which decreased almost SR 17 billion during August due to a dramatic fall of almost SR 26.5 billion in government deposits.

Chief economist at the BSF, John Sfakianakis, stated that bank lending to private businesses recorded the slowest growth rate in five months.

It was expected that commercial activities would decrease slightly during Ramadan as businesses operate on shorter work days and close for a week’s worth of holidays at the end of the holy month for Eid al-Fitr.  Bank credit extended to the private sector – which does not include private securities investments – decreased to 1.7 per cent (year-on-year basis) growth in August, down from 3.4 per cent growth in July.  It is the slowest growth seen since March.

Sfakiankis noted that total claims the bank has on private businesses increased by about 3.3 per cent during August, compared to 4.9 per cent in July.

Claims in the private sector have increased 4.4 per cent since levels seen in December, but Sfakiankis said the momentum is still weak.

Factors such as tighter criteria for loan approvals and a less needy private sector have put a damper on credit growth.  Businesses are remaining cautious about major plans for expansion and are more reliant on their established government contracts and current working capital.

Sfakiankis noted that the swollen foreign assets in Saudi’s banks are a consequence of weaker lending.  The banking industry’s foreign assets are twice as much as they were at the close of 2008.

The commercial banking sector has healthy liquidity, but instead of lending those funds the banks have parked them in overseas investments or left them securely in the central bank.

In August the banks worked to lower their collective holdings in the reverse repo window at the central bank.  That amount dropped by 20.7 per cent from July and resulted in levels that were less than half what they were at the beginning of this year.

Net income for the banks in the kingdom have been stifled for the last two years due to weaker domestic credit coupled with a push to increase loan loss provisions.

The opening half of 2010 saw the net earnings for the list of 11 banks in Saudi Arabia (not including the National Commercial Bank, Saudi’s largest bank) drop by almost 9.4 per cent, falling from SR 12.94 billion in the first six months of 2009 to SR 11.72 billion.

Balance sheets indicated that earnings for the second quarter of this year dropped around 9.4 per cent, falling from SR 6.54 billion in Q2 of 2009 to SR 5.93 billion in Q2 of 2010.  Statements also showed that the consolidated income for that quarter was up from the first quarter amount of SR 5.79 billion.

Saudi banks are experiencing circumstances similar to other oil producing nations in the Gulf.  Profits have been shaved off by weighty loan loss provisions after the worldwide financial crisis in 2008 and a serious crisis and debt default with two business conglomerates in Saudi Arabia.

An investment firm in Saudi Arabia reported that kingdom banks are experiencing better performance in the last half of 2010 as government lending picks up again.

Collective net profits for the dozen commercial banks in Saudi Arabia in August totaled about SR 2.7 billion, bringing the cumulative total to SR 19.3 billion for the first eight months of 2010.

Jadwa Investments out of Riyadh stated that lending to private businesses had grown as expected when looking at the year-to-date averages in July.  Banks also increased lending to the public sector which saw the excess bank reserves at the Saudi Arabian Monetary Agency (SAMA) fall to a 19-month low.  This may have also contributed to an increase in profits.

Sfakianakis noted that stronger oil prices allowed the kingdom to boost net foreign assets up to SR 1.57 trillion by the close of August.  These figures, that have not been this high since February of last year, lend strength and support to Saudi’s fiscal position.

The economic growth in the kingdom is driven by state spending and the monetary outlook is still guarded, even though lending and the supply of money is expected to experience modest growth for the balance of this year.

Sfakianakis said that Saudi’s central bank, SAMA, increased its foreign assets by almost SR 53.7 billion in 2010.  By the close of August SAMA’s foreign security investments climbed 4.9 per cent, resulting in 7.4 per cent gains for 2010.  In comparison with last year, overseas bank deposits rose by nearly 33 per cent at the close of August.

Paul Holdsworth, Staff Writer, Gulf Jobs Market News
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