Dubai: Saudi Arabia’s banking sector is expected to face further squeeze on liquidity as banks face sustained decline in deposits aggravated by decline in economic growth and fiscal adjustments necessitated by persistent fall in oil prices.
Latest data from Saudi Arabia Monetary Authority (SAMA), the country’s central bank, shows that Saudi banks had recorded a 0.5 per cent decline in total deposits in May, after decreasing by 0.7 per cent in April. These two consecutive months of declines contributed to a six-month decline of 0.9 per cent and a 12-month drop of 3.4 per cent, which is the largest 12-month decline in deposits since August 1994.
Rating agency Moody’s said last week that the declines [in deposits] are credit negative for Saudi banks because they add to the liquidity pressure that banks are already experiencing as a result of the drop in oil prices and associated government revenues, even though loan growth has remained above 9 per cent since January.
“Tightening liquidity is negatively affecting banks’ loan-to-deposit ratios and liquid asset levels and will negatively affect banks’ cost of funding and profitability, with knock-on effects increasing nonperforming loan ratios (NPLs),” said Olivier Panis, Vice President — Senior Credit Officer at Moody’s.
The drop in deposits has further widened the gap with loan growth. Although government deposits have stabilised, rising 0.1 per cent in May, it is still down 4.5 per cent year to date. Private-sector deposits decreased 0.9 per cent in May and are down 0.1 per cent year to date. This points to a contraction in the private sector’s available cash and profits.
Dubai-based Arqaam Capital said in a recent report that tighter liquidity conditions are likely to persist for Saudi banks in the medium term. Liquidity has tightened as the government has withdrawn deposits and sold local currency debt.
Saudi banks’ tightening liquidity is leading to a gradual deterioration of the banking system’s loan-to deposit ratio, as indicated by the ratio of total claims (including loans and investments) to total deposits rising to 107 per cent in May after having increased to more than 100 per cent in February for the first time since February 2009.
Although banks’ level of liquid assets remains high with average Basel III liquidity coverage ratio at 193 per cent at the end of 2015, the ratio of liquid assets to total assets has declined over the past 18 months, reaching 17.1 per cent as of March 2016 from 22.3 per cent as of December 2014.
“Tightening liquidity is increasing banks’ cost of funding, as reflected by a rise in the three-month Saudi Interbank Offered Rate (SAIBOR) to a high of 2.23 per cent on 21 June from 0.77 per cent a year earlier. Although banks’ profitability has so far remained stable, with a return on assets of 2.1 per cent as of first-quarter 2016, we expect that sustained loan growth will fuel higher competition for deposits and higher recourse to market funding, which will increase funding costs,” said Panis.
Analysts have been cutting their earnings projections for Saudi Arabian banks amid the highest borrowing costs in seven years and expectations that provisions for NPLs will start to rise.
The central bank earlier this year attempted to ease this cost pressure by increasing the maximum loan-to-deposit guidance to 90 per cent from 85 per cent, which is seen as credit negative for banks.
Without an easing of liquidity pressures the decline in deposits is expected to lead banks to become more selective in their lending and customers’ borrowing costs are likely to rise.