Riyadh-Mubasher: The relaxation of loan-to-deposit ratio limits for Saudi Arabian banks, announced on 14 February, is in response to liquidity tightening in the banking sector, Fitch Ratings said in a recent report.
The central bank increased the maximum loan-to-deposit ratio to 90% from 85% to free up liquidity, allowing banks to grow lending and invest in additional government bonds. The government plans to boost issuance of securities in the local market in 2016 to fund a growing public-sector deficit.
Saudi banks are largely deposit funded and the new 90% limit will still mean that they operate with some of the lowest ratios among GCC peers. With the exception of Bahrain, other GCC banking sectors work with loan-to-deposit ratios at or in excess of 100%.
The banking sector is growing, with assets up 3.6% in 2015, but this is a slow pace of growth compared to the 11.4% annual average reported over the past three years. A tightening of liquidity in the Saudi banking sector is reflected in a shift in the composition of both assets and liabilities, according to the report.
Loans rose slightly to 61.6% of sector assets at end-2015, from 58.6% at end-2014 and the proportion of liquid assets shrank. Liquid assets - comprising cash and cash reserves, largely placed with the Saudi Arabian Monetary Agency (SAMA), plus SAMA securities, government and private sector bonds and interbank placements - represented just 15.6% of assets at end-2015, down from 22.3% at end-2014. This reflects a sharp reduction in holdings of SAMA securities, a strong increase in government bonds, albeit from a low base, and a sharp increase in interbank placements, but also from a small base.
“On the funding side, deposit growth slumped to just 1.9% in 2015 compared with 12.4% in 2014. Private-sector deposit growth was weak, but still positive. However, public-sector deposits shrank, albeit at a marginal 1.5%, for the first time in many years,” Fitch said.
Demand deposits that are non-remunerated fell back only slightly during the year, representing 60.8% of total deposits at end-2015 (end-2014: 62.8%). Three-month SAIBOR rates paid on local-currency deposits in December 2015 reached 1.3%, well above the 0.9% rate paid at end-2014.
“The banking sector outlook and the rating outlooks for seven Saudi banks are negative, as is our outlook for the sovereign rating,” Fitch concluded.
