Riyadh: Saudi Arabian banks are lending the most in at least five years as the government’s plan to invest $500 billion in new housing, infrastructure and industry boosts confidence in the kingdom’s economy.
Bank credit climbed 13 per cent in the 12 months ending in May to 868 billion riyals (Dh849 billion), according to central bank data. Ten of 11 publicly-traded banks reported raising the value of their loan portfolios in the first six months.
“Bank lending to the private sector will increase by 14 per cent this year,” Paul Gamble, Riyadh-based chief economist at Jadwa Investment Co., said in response to e-mailed questions. “Strong economic-growth prospects have reassured banks about the lending environment and spurred demand for credit. Although the loan-to-deposit ratio has edged up in the past couple of months, banks remain liquid and fairly keen to lend.”
King Abdullah’s spending plan, which is based on a forecast that the kingdom needs to build 1.25 million new homes by 2014, encouraged banks in the world’s biggest oil exporter to arrange a record $7.9 billion of syndicated loans in 2012, data compiled by Bloomberg show. Alinma Bank posted the largest increase in loans with a jump of 33 per cent, while Al Rajhi Bank, the biggest lender by market value, reported a 23 per cent gain.
CDS decline
The economy of the world’s largest oil producer is forecast to expand 4.8 per cent this year, the second-fastest pace in the GCC after Qatar, according to an April survey of economists compiled by Bloomberg.
The cost of insuring Saudi debt against default fell to 115 basis points, or 1.15 percentage points, on July 13, the lowest level since November 14, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The contracts for Qatar and Abu Dhabi were at 121 basis points and 122 basis points, respectively, according to the data.
Of the 10 Saudi banks that reported gains in second-quarter net income, Al Jazira’s profit doubled to 129 million riyals and Bank Albilad’s net income advanced 88 per cent. Al Rajhi bank’s profit climbed 14 per cent. All Saudi publicly traded banks reported an increase in assets at the end of the June, according to statements from the banks.
“In terms of earnings, the driving factor has been revenue growth,” Murad Ansari, Riyadh-based analyst at investment bank EFG-Hermes Holding SAE, said in response to e-mailed questions. “Loan growth is contributing to fee income, while provisioning costs have also appeared to have largely stabilised.”
European fallout
Saudi Arabia’s “very high reserves” are helping shield the country’s banks from any fallout from the European financial crisis, Economy and Planning Minister Mohammad Al Jasser said in May. Net foreign assets of the kingdom’s central bank increased 22 per cent in May to 2.2 trillion riyals from a year earlier, central bank data show.
Saudi bank lending growth slowed in 2009 and 2010 after two family-owned businesses defaulted on at least $15.7 billion (Dh58 billion)of loans and amid the global credit crunch.
“It is clear that banks are more confident and the liquidity situation is still good even if rates have edged up a bit,” Jarmo Kotilaine, chief economist at Jeddah-based National Commercial Bank, said. “The banks are through the provisioning cycle and many are looking to systematically build up their asset base. Apart from standard consumer loans, there is an effort to boost things such as SME and mortgage lending.”
Mortgage law
In March 2011, King Abdullah announced a plan to spend $67 billion (Dh246 billion) to build 500,000 homes to tackle the shortage at a time when social unrest was spreading across the Middle East in the wake of uprisings in Tunisia and Egypt.
The mortgage law, approved after a decade of debate, is a package of five separate laws that will overhaul the home-finance market and provides for the creation of mortgage providers, the foreclosure process and the oversight of lenders. Regulations required to implement the law will be issued within three months, Saudi Arabia Finance Minister Ebrahim Al Assaf said in comments published by the Saudi Press Agency.
“The mortgage law is credit positive for Saudi banks,” Moody’s Investors Service wrote on July 9. “We expect it to enhance their asset growth potential, strengthen the profitability of retail franchises and increase loan book diversification.”
Housing loans represent about 3 per cent of banks’ loan portfolios and about 2 per cent of the kingdom’s gross domestic product, Moody’s said. That compares with 5 per cent to 10 per cent of GDP in most other Gulf Cooperation Council countries, it said.
“With growth domestically driven, we don’t think global economic conditions will derail bank lending,” Gamble said.
