Saudi manufacturing sector to boost bank credit

JEDDAH – The Saudi banks have been keen on grasping lending opportunities over the last couple of years and it has reflected positively on their profitability, the National Commercial Bank said in its “Saudi Economic Review” for the month of March 2014.

The report said the strategic allocation of investments along with an overhaul in the asset/liability composition and expanding the maturity curve, aided banks in announcing record income levels. During 2013, total claims of the banking system, excluding T-bills and government bonds, expanded by 12.0 percent Y/Y, reaching SR1.12 trillion. A total of SR120.5 billion worth of fresh lending was added to banks’ balance sheets last year.

The miscellaneous sector, which is largely composed of consumer lending, grew by 16.4 percent during last year. Analyzing the remaining sectors in absolute terms, the commerce sector increased its share by SR28.7 billion to reach SR234.8 billion, which translated to a gain of 14.0 percent on an annual basis.

The mining and quarrying sector has more than doubled in a span of two years and recorded the highest growth rate at 34.3 percent Y/ Y last quarter. Projects such as Maaden and Alcoa’s aluminum refinery worth SR5.6 billion and Hanwha’s gold processing plant worth SR1 billion were captured by banks as they diverse their portfolios. We do see that the elevated oil prices will support the government in maintaining its fiscal expansionary policy going forward, albeit our expectation of a substantially lower budget surplus this year. The influx of revenues will trickle down to businesses via project finance, thus, underpinning private sector growth.

Credit to the manufacturing and processing sector recorded an annual rise of 10.7 percent, reflecting the rising contribution of the private sector to the economy’s GDP.

Saudi is import dependent and, hence, growth in the manufacturing segment is crucial to sustain an expanding economy.

Furthermore, the building and construction sector recorded a benign 1.6 percent increase annually, dropping 3.3 percent Q/Q in the fourth quarter from the previous period. The 2011 royal decrees included a huge vision for the residential market by announcing the plan to construct an additional 500,000 units worth SR250 billion.

However, very few projects have commenced past the initial planning and design phases, which limited opportunities for banks to secure new financing deals within this category.

Furthermore, the transport sector contracted by 1.2 percent annually, the third consecutive annual decline. Numerous projects have been announced in the transport sector and some have been awarded during the third quarter such as Riyadh’s light rail transit lines that is valued at SR87.0 billion and is expected to increase the level of activity within the sector moving ahead.

Notably, NCB’s Construction Contracts Index fell from the record set in 3Q at 494.09 to 465.03 by the end of 4Q, yet the total value of contracts still managed to reach SR293.4 billion, a new record high The Saudi financial system has implemented safety measures that limited the banking system’s susceptibility to external shocks.

SAMA’s adoption of Basel III, starting early 2013, along with its prudent guidelines of raising banks’ capital adequacy ratio will position the banking system on a much sturdier foothold relative to regional peers, the report forecast.

Unsurprisingly, a recent decision by Fitch to reassess the Saudi banking industry reaffirmed its stable outlook, with the renowned rating agency upgrading three banks from negative to a stable outlook, namely SABB, BSF, and ANB. Furthermore, the sovereign credit rating of the Kingdom was also upgraded this month to AA with a stable outlook from AA-.

The Saudi banking system is embarking on a new playing field, as the majority of banks are increasing their capital as much as 100 percent, as in the case of Riyad bank. The new capital infusion will provide banks with the opportunity to increase their lending activities and avoid breaching the credit concentration requirements, stipulated in the banking control law of 1966. Given that the loans-to-deposits (L/D) ratio peaked last August at 83.1, banks have been attempting to lower that ratio as per SAMA’s guidelines. SAMA’s policies have been essential in guiding banks through the financial crisis and supporting banks to reach new feats. The bulk of banks’ deposit liabilities is represented by demand deposits which gained 17.3 percent Y/Y by the end of January.

Businesses and individuals have added 16.4 percent Y/Y to their demand deposits while government entities increased their demand deposits by 28.5 percent on annual basis to reach a record SR75.7 billion.

Meanwhile, the interest-bearing counterpart lags behind, as it is difficult to lure businesses and individuals given the low interest rate environment. However, government entities’ pursuit of longer maturities has increased their time and savings deposits to SR153.0 billion, a gain of 20.3 percent annually by the end of January.

Furthermore, other quasi-monetary deposits increased at an annual 10.6 percent, with a notable deceleration in the outstanding remittances following the correctional program of the labor market.  On the assets side, total claims of the banking system, excluding T-bills and government bonds, maintained its pace at an annual 12.0 percent gain for the month of January. Given the higher base in 2013, growth rates were anticipated to slow after peaking at 16.7 percent in December 2012. Regardless of the deceleration, the credit market is likely to maintain a stable upward trajectory.

The fiscal expansionary policy of the Kingdom will maintain demand for financing. As total loans were outpaced by total deposits’ growth, the L/D ratio dropped to 79.0, reflecting a lower utilization ratio. Regarding the maturity of credit, banks continue to seek longer-term opportunities. Short-term credit gained by 9.5 percent Y/Y and medium-term credit expanded by only 7.4 percent annually during January.

Meanwhile, long-term credit accelerated at 20.8 percent Y/Y to reach SR330.9 billion, a new record. The private sector is expected to drive the economy this year. Consequently, private sector credit will likely maintain double-digit growth rates throughout 2014. Banks were able to expand their portfolio by extending credit to the private sector with an additional SR116.0 billion during the twelve months through January, an 11.9 percent annual addition.

Furthermore, claims on the public sector grew by 24.7 percent Y/Y driven by the increase in T-bill issuances. The government’s control on excess liquidity resulted in a 29.5 percent rise in T-bills, reaching SR185.4, another record high achieved this January. Additionally, government bonds rose by 19.0 percent on an annual basis. As for the government’s policies, SAMA governor announced Saudi’s intention of maintaining its current monetary policy despite the tapering in the US. However, we expect a change in tone once the US completely withdraws its QE program and starts to hike rates. Saudi is accustomed to the wait-and-see approach and a preemptive decision regarding its policy is highly unlikely.

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