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Lowest Saudi bad loans since 2009 default

Banks lending at the fastest pace in more than three years

Image Credit: Bloomberg
The Saudi Arabian Monetary Agency in Riyadh. Saudi Arabia’s economy is set to grow 5 percent this year, the second-fastest pace in GCC after Qatar and on par with Kuwait.
Gulf News

Riyadh: Saudi Arabian banks will cut their bad-loan ratio to the lowest since the region’s biggest corporate default three years ago as lending grows on the back of government spending, Moody’s Investors Service said.

The ratio of non-performing loans at Saudi lenders will drop to about 2.5 per cent this year, the lowest since at least 2009, Khalid Howladar, a vice-president at Moody’s, said on August 9. That compares with forecasts of 8.5 per cent this year in the United Arab Emirates, the second-biggest Arab economy, and 4.2 per cent in the US last year, according to Moody’s.

Banks in the world’s top oil exporter are lending at the fastest pace in more than three years as the government’s $514 billion spending programme encourages companies including Saudi Arabian Mining Co. and Saudi Acrylic Monomer Co., to expand. Loan growth is recovering after two Saudi family holding companies, Ahmad Hamad Al Gosaibi & Brothers Co. and the Saad Group, defaulted on at least $15.7 billion of loans in 2009, a shock that prompted banks to virtually freeze new lending.

“Banks have certainly learnt their lessons from the Saad and Al Gosaibi episode,” Howladar said by phone. “One of the ways that banks are dealing with some of these big borrowers is to insist on taking security for any loan so that there is something tangible backing that exposure. It’s the unsecured lenders that have tended to lose the most.”

Borrowing costs

The kingdom’s non-performing loan ratio peaked at 4.1 per cent in 2009 and economic growth, set for the region’s second-highest rate in 2012, slowed to a 10-year low of 0.1 per cent that year.

A pickup in loan growth to private businesses to 14 per cent in June, the highest since March 2009, has driven up borrowing costs in the country of about 28 million. The yield on three- month Saudi treasury bills rose to 0.37598 per cent, the highest in almost two months, at an auction last week, according to data compiled by Bloomberg. Yields on one-month, six-month and one- year securities sold at the kingdom’s weekly auction were unchanged.

The three-month Saudi Interbank Offered Rate, the benchmark domestic banks use to lend to each other, has jumped 17 basis points this year to 0.95 per cent yesterday. The advance is the biggest in the six-nation Gulf Cooperation Council in 2012 and has led to a more than doubling of the spread between Saudi and US rates to 51 basis points, data compiled by Bloomberg show.

Economic Recovery

Saudi banks’ cumulative profits, which fell in each year from 2008 to 2010, grew 15 per cent in the year to June, central bank data show. Profit at Al Rajhi Bank, Saudi Arabia’s biggest publicly traded lender, rose 14 per cent in the three-month period.

The largest Arab economy is set to grow 5 per cent this year, the second-fastest pace in the GCC after Qatar and on par with Kuwait, according to the median estimate of 12 economists compiled by Bloomberg in July. The price of crude has averaged $96 a barrel so far this year in New York, compared with $95 a barrel last year and $80 a barrel in 2010. The price was $92.87 a barrel on Aug. 10.

“Oil prices are still high and the increased government spending will benefit the Saudi banks,” Howladar said.

Banks haven’t forgotten the shock of 2009, when about half of their non-performing loans were due to defaults by Al Gosaibi and Saad, according to Moody’s estimates.

Managing Risk

Al Rajhi Bank raised provisions for loan losses by 9.1 per cent in the second-quarter to 378 million riyals ($101 million). Provisions jumped more than five-fold at Samba Financial Group to 60.9 million riyals.

“Banks are looking to increase their bad loans coverage and in most cases we have seen NPL-loan coverage move up,” Murad Ansari, a Riyadh-based analyst at EFG-Hermes Holding SAE, said by phone on Aug. 8. “We are in much better shape where the overall economic environment is concerned and banks are being much more cautious in terms of managing risk.”

These precautions are partly due to banks’ push into lending to smaller companies and consumers, including home loans. Saudi Arabia approved its first mortgage law this year to help encourage lenders to expand credit in the segment.

Banks including Samba Financial Group and Saudi British Bank “have a greater share of mortgage lending in their retail portfolio, which is at present riskier than consumer lending,” Chiradeep Ghosh, an analyst at Securities & Investment Co. in Bahrain, said by phone on Aug. 9. “Riyad Bank is enhancing its small-and-medium-enterprise portfolio. The SME sector does offer you much higher returns, but the probability of default is relatively higher.”

Still, provisions at Saudi banks should be “broadly stable” this year, Ghosh said. Much of the momentum behind new lending is government spending, which gives banks greater security as they arrange the most syndicated loans on record in 2012, according to data compiled by Bloomberg going back to 1999.

Most new projects that banks are lending to “are essentially, one way or the other, linked to the government spending plans,” Ansari at EFG-Hermes said. “So there is a high degree of safety where that is concerned.”