Bank deposits in the Kingdom averaged 7.5% in 2015 compared to an average of 13.6% a year ago, the National Commercial Bank said in its February "Saudi Economic Review". The year 2015 ended on a deadbeat growth in deposits by just 1.9%, the slowest growth in five years. In the context of sharp oil price declines trickling down to the depositary base, SAMA raised the implicit loan-to-deposit ratio (L/ D) limit up to 90% from 85% previously thus allowing more asset utilization for banks which seek to expand their credit portfolios. The decision could reflect positively on banks' profits and spark a credit-induced economic growth; however, from a credit standpoint it entails relaxing one of SAMA's proudly held safeguards against over -leverage. SAMA's conservative prudential policies are considered a strength in the traditional Saudi banking system, and despite raising the L/D ratio, Saudi banks will still meet Basel III standards albeit with lesser liquidity buffers. Effective L/D ratio increased to 84.8%, up from 79.4% the same month in 2014. The traditional Saudi banking system relies on bank deposits as a primary source of funding, and the dominance of demand deposits have been historically a structural limitation to long-term loans extended by banks. In December, NCB said demand deposits declined by 1.3%, representing 55% of broad money supply, while time and savings deposits rose by 9%, making up 24.5%. Meanwhile, private sector credit maintained 9.8% Y/Y growth which is markedly lower than 2014's average of 12.5%. "We expect lower government revenue from oil to further affect loan performance," the report said. In addition, the Federal Reserve's expected rate hikes in 2016 will contribute to tightening liquidity owing to the USD/ SAR peg, and the Saudi Interbank Offered Rate (SAIBOR) currently at 1.7% will increase the cost of funding. Credit activity is expected to catch up with the slowdown in deposits, and "we expect a fall to mid-single digits in 2016 although softer regulations will likely widen the gap between credit and deposit growth." the report said. The loan composition by maturity during the month stood at 50.3% for short-term, 17.7% for medium term, and 31.9% for long term loans. Asset reallocation revealed a fall in T-bills by 39.7% and credit for public sector enterprises by 15.3%, meanwhile annualized growth in government bonds is at 62.2%. The deficits will result in less government spending which is a key engine for the Saudi non-oil sector. Therefore, in order to stimulate growth, we expect continued issuances of bonds throughout 2016. Prolonged low oil prices, however, will start to strain banks' profitability margins as lower volume growth will undermine rising interest rates. Reflecting the trickle-down effect on the economy, the value of Point-of-Sale transactions (POS) marked 6.5% Y/Y despite the number of transactions during December surging to a record high of 43.9 million transaction. The SAIBOR currently stands 1.7%, the highest since September 2009. Liquidity squeeze concerns are bidding the interbank rate higher, making it more difficult for banks to maintain profit margins. With a higher benchmark interest rate, NCB projects to see tighter consumer loans amid weaker fundamentals, further exposing banks to funding volatility. "While we expect growth in lending this year to moderate, possibly to 5% Y/Y, softer SAMA prudential policies should provide some noticeable support," the report noted. — SG
