The credit situation in Saudi banks is still on the rise despite the strain on liquidity in the financial system. 
In the month of August, total bank credit posted an annualized 7.9 percent, maintaining growth momentum despite the deceleration, the National Commercial Bank (NCB) said in its latest report. 

In 2015, total credit growth averaged 9 percent Y/Y, contrasting with 9.2 percent Y/Y in the months leading to August since the beginning of 2016. Strong liquidity buffers mandated by Saudi Arabian Monetary Agency (SAMA) helped the banking system remain resilient and withstand the oil shock. 

However, the growing pressure on the Saudi economy and the banking system led the government to cut public sector salaries by up to 20 percent and reduce allowances that reach up to 30 percent of annual income. About two thirds of Saudis are employed in the public sector, so we expect to see a sizable impact in 2017, narrowing the expected fiscal deficit of SR327 billion this year. 

After the Saudi government unleashed its latest fiscal consolidation measure which targeted government employee benefits, SAMA instructed local banks to reschedule consumer loans without adding extra fees or changing the interest charges. 

By the end of September, consumer loans extended by banks excluding credit card loans and real estate loans totaled SR343.9 billion, surging by 7.8 percent Y/Y. 

Total bank loans to both the public and private sector excluding securities stood at SR1.43 trillion of which 96.7 percent is lent to private sector enterprises. 

The focus has shifted towards the Kingdom’s first benchmark bond issuance totaling $17.5 billion, easily trumping Qatar’s $9 billion bond sale. The liquidity that is expected to be injected into the Saudi economy will help alleviate the liquidity squeeze on Saudi banks, allowing them to maintain growth projections over the short term. 

Strong macro prudential policies at SAMA, in addition to low global inflation and negative interest rates in major central banks fueled the huge demand for Saudi Arabian bonds. Such investor confidence reflects how well the Saudi Arabian government communicated its vision and adamancy to balance the budget by year 2020. 

Despite the volatile and weak performance in the oil market, robust profitability and adequate capitalization will provide a sufficient buffer against event risks and deteriorating asset quality. By the end of August, the loan-to-deposit ratio (L/D) stood at 90.8 percent, the highest since February 2006, the NCB report said. 

Despite breaching the 90 percent L/D threshold since June, the conservative prudential framework of SAMA left the ratio unchanged. Instead, SAMA injected the banking system with over SR20 billion as short-term deposits and availed repo transactions with the maturity of 7, 28, and 90 days in addition to the one day maturity. 

Moreover, SAMA lowered the ceiling of its bills issuance to SR3 billion/week from SR9 billion/week previously, effective on Oct. 30. Saudi banks’ holdings of SAMA bills amount to SR38.5 billion which is below last year’s holdings by 79.3 percent. On the other hand, bank holdings of government bonds stood at SR169.7 billion, surging over last year by 161.1 percent. 

The 3-month average Saudi interbank offered rate (SAIBOR) rose rapidly after the third quarter of 2015, standing at 2.38 percent by the end of October. 

The spread between SAIBOR and its London counterpart, LIBOR, stood at 154.7 bps, yet the recent announcements are contributing to- wards reducing the spread and alleviating domestic pressures in the banking system.

Source: Arab News