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Saudi banks' credit to private sector remains tight

But lending to public sector surges as banks become more risk-averse
Saudi banks are keeping curbs on lending to the private sector as they appear uninfluenced by their swelling deposits and a recovery in the domestic economy because of strong oil prices, a key local bank said on Saturday.

In contrast, their credit to the public sector recorded a big leap in September, reflecting the fact that the Gulf Kingdom's 12 commercial banks are still risk-averse and the credit appetite of the private sector itself is still weak, Banque Saudi Fransi (BSF) said in a study sent to Emirates 24/7.

"The bank lending atmosphere in Saudi Arabia remained relatively stationary in September, with only a slight pick up in private sector credit growth taking place even as money supply growth improved to a seven-month high and deposits made their biggest monthly gains since early 2009," BSF said.

It cited figures by the Saudi Arabia Monetary Agency (SAMA) showing that

commercial and consumer activity was subdued in September, which corresponded with the end of Ramadan and the start of Eid Al-Fitr,

But it noted that Saudi Arabia, the world's top oil exporter, continued to benefit from robust oil prices, which averaged $77 in August and $75.50 in September, enabling SAMA to build its foreign assets by11 per cent in the first nine months.

At a time when private sector lending activity is muted, the state's ability to

finance key expansion projects without drastically deteriorating its fiscal position is crucial, according to BSF's chief economist John Sfakianakis.

In October, for instance, the state-run Public Investment Fund granted SR4.88 billion in financing to joint venture Saudi Aramco-Total Refining, he said.

"SAMA numbers highlighted yet again the banking sector's wariness and vigilance toward new lending as well as subdued demand for credit from the private sector. Claims on the private sector accelerated 3.6 per cent year on year to SR773.17 million, including a 0.8 per cent increase from the month earlier."

The figures showed growth in claims on the private sector had fallen from 4.9 per cent in July to 3.3 per cent in August.

"Without a big turnaround in the fourth quarter, growth in private sector claims may fall slightly short of our eight per cent forecast for the year," BSF said.

"Stripping out investments in private securities, outstanding bank credit to the private sector grew 2.6 per cent in September, from 1.7 per cent in August - again underpinning hesitation among the country's banks."

Credit to public sector enterprises, meanwhile, jumped by nearly 18 per cent in September, including a 9.6 per cent gain from August, to SR33.94 billion. "Government agencies are bearing the brunt of the financing burden for strategic projects in infrastructure, energy and utilities, so the rise in lending by more than 20 per cent in the first nine months of the year is not surprising," BSF said.

The report, citing data by the Ministry of Finance, showed the Saudi government granted 3,184 contracts worth SR101.2 billion for construction and education projects alone in the first three quarters.

It said subdued lending caused the banking sector's loan-to-deposit ratio to fall to 81 per cent in September from 82.6 per cent in August as loan growth failed to build momentum as quickly as deposits, which grew 4.8 per cent year on year.

Demand deposits, which do not pay interest and are easily accessible, have

been favoured this year due to the low interest rate environment, although their pace of growth in September was slower than deposits in time and savings, and foreign currency accounts, according to the report.

It showed demand deposits expanded 0.9 per cent from August, while time and savings deposits grew 3.8 per cent, and foreign currency deposits jumped by around 10.9 per cent from the month earlier.

The report showed demand deposits still make up 51.9 per cent of total deposits in Saudi banks, up from 41.8 per cent at the beginning of 2009.

Overall deposit growth of 3.2 per cent from August was the fastest month-on-month increase since February 2009, it said.

"The recovery in credit expansion is taking longer than earlier anticipated, but the gradualist approach is more prudent than the exuberance practiced by many banks prior to 2009.... we are unlikely to see a return of double-digit rates of credit growth before 2012 and 2013, when private sector appetite picks up following a period of deleveraging," Sfakianakis said.

"Reinforcing the pace of bank credit growth remains a key challenge for the Saudi banking system, although sentiment on the outlook for loan accessibility is gradually improving. The proportion of business leaders who described banks' lending attitude as 'not good' in the fourth-quarter BSF Business Confidence Index fell sharply to 21 per cent from 46.5 per cent in the third quarter - and almost 60 per cent in the first quarter."

The report expected a partial recovery in bank credit in 2011 as a greater volume of project financing deals comes on stream, "although a majority of respondents to the survey said banks had tightened requirements for loan approvals to businesses and households substantially in the past year."

The report showed Saudi banks are still turning abroad to invest their excess liquidity and offset the slowdown in domestic credit.

Its figures showed their investments in foreign assets jumped 34.2 per cent between January and September, including an 11.1 per cent month-on-month rise in September. The money banks held in the central bank's reverse repo window, meanwhile, surged 38.7 per cent in September from August, having dropped by a similar amount in the prior two months, it said.

© Emirates 24|7 2010