JEDDAH: Saudi banks' loan growth to the private sector continued to follow cautious course toward recovery in February, rising more than 1 percent from January levels in the largest monthly gain in a year and a half, indicating that efforts to rebuild confidence in the banking sector and engage the private sector are making some headway, Banque Saudi Fransi said in its latest Monetary Indicators released Wednesday. Private sector loan growth showed its best monthly performance in a year and a half, money supply growth accelerated for a fourth month and deposits grew at their fastest annual pace in more than a year, Saudi Arabian Monetary Agency (SAMA)'s monthly bulletin said, which also showed a slight dip in net foreign assets from record levels a month earlier. Total bank claims on the private sector advanced 6.3 percent in February. Project financing for larger-scale ventures will be the key catalyst behind the kingdom's credit recovery in the medium term in our perspective. The proportion of loans outstanding in February carrying maturities of three years or longer rose for a fifth month to account for more than 25 percent of total loans. By comparison, long-term loans comprised 21 percent of total loans two years ago, underpinning the shift in focus. Loans maturing in less than one year still account for the largest proportion of total credit, although the ratio has fallen to 58.2 percent in February from about 65 percent two years ago. The Saudi banking sector's loan-to-deposit ratio was virtually unchanged in February at 78.65 percent, after having held above 80 percent throughout most of 2010. This, again, underscores that Saudi banks enjoy ample liquidity, although the propensity to scrutinize new loans continues. Furthermore, private sector credit demand is yet to return as the government funds steer the country's development program. Net foreign assets held by Saudi commercial banks rose 10.3 percent in February from the month earlier, taking them to seven-month higher of SR115.14 billion. SAMA monetary policy over the past two years has been one of trying to encourage banks to lend by holding interest rates steady at 0.25 percent for the reverse repurchase rate and 2 percent for the repurchase rate, in line with US Federal Reserve policy. Barring a significant turnaround in loan growth and rapid rise in inflation, the most likely scenario is that interest rates will remain unchanged into 2012. Private bank credit, excluding investments in securities, increased to SR756.43 billion in February, up 5.9 percent year on year and 1.1 percent month on month, the highest rate of monthly growth since August 2009, showed data in the SAMA's bulletin. Total bank claims on the private sector advanced 6.3 percent in February, highlighting that many long-term loan deals are beginning to be reflected in bank balance sheets. Moreover, private consumption in the first quarter rose, which supports a view that consumer indicators should continue to show improvement over last year, said Dr. John Sfakianakis, BSF chief economist. "Offering employees a one-off, two-month salary bonus provides individuals with 17 percent more money to spend this year. The repercussions of this will likely become evident in consumption patterns through the course of the year," he added. Point-of-sale transaction data were strong for February, witnessing a 21.4 percent year on year rise, although they reflected a 3.4 percent decline from January levels possibly due to the shorter length of the month. The value of commercial and personal checks also dropped 16.1 percent month on month in February but remained 3 percent higher than they were a year earlier. Project financing for larger-scale ventures will be the key catalyst behind the kingdom's credit recovery in the medium term in our perspective. The proportion of loans outstanding in February carrying maturities of three years or longer (classified as long term) rose for a fifth month to account for more than 25 percent of total loans. By comparison, long-term loans comprised 21 percent of total loans two years ago, underpinning the shift in focus. Loans maturing in less than one year still account for the largest proportion of total credit, although the ratio has fallen to 58.2 percent in February from about 65 percent two years ago. Wholesalers and retailers could also take such consumption into consideration when building inventories this year, which would have a positive bearing on import flows. One way to gauge imports is to look at data on new letters of credit issued against the import of goods. In February, new LCs grew an annual 15.4 percent, and 13.9 percent month on month. This reflected a 19 percent jump in LCs against building materials imports, a massive 62 percent surge in the number of LCs taken out to finance the import of automobiles, and a 14.2 percent rise in LCs taken against machinery imports. Money supply growth rates are likely to accelerate in the coming months as a result of one-time bonus payments provided by the government and private sector in the first quarter of the year. While the rate of money supply growth remains far from peaks above 20 percent that had fuelled inflation in 2008, a return to consistent double-digit money supply growth later this year would have some ramifications on inflation. The kingdom's monetary base, comprising highly liquid currency in banks and held by the public, rose climbed 2.4 percent year on year. A rise in the monetary base means that banks may be piling up on reserves with SAMA rather than of lending it. Banks are unwinding credit and should continue to gradually expand the pace of lending. Deposits gained momentum for a fourth month, their rate of annual growth rising to 8.2 percent in February from January's 7.7 percent. Deposits in Saudi banks now stand at SR996.92 billion, including 54.3 percent held in non-interest-bearing demand deposits. Saudi depositors have gravitated toward demand deposits due to the low interest rate environment, taking the total ratio of funds held in this type of deposit from under 42 percent at the start of 2009 to more than 54 percent now. Demand deposits grew 22 percent year on year in February while time and savings deposits fell 7.9 percent, now accounting for 29.4 percent of total deposits. There was a mild monthly rise in time and savings deposits of 1.2 percent in February, while foreign currency deposits grew 2.1 percent. Money supply data also showed a pick up in economic activity. Broad money supply growth (M3) accelerated to 8.6 percent in February, the fastest year on year growth since 2009. A steep and continuous rise in broad money supply could lend impetus to inflation. Growth in M2 – which includes demand deposits, currency outside banks and time and savings deposits - edged lower to 9.9 percent in February after hitting a 15-month high above 10 percent the month earlier. Still, month on month growth in M2 picked up from January. Yet, public sector credit fell for a second month to SR27.7 billion in February, according to the data, a 5.7 percent year-on-year decline, while over all claims on the public sector, which also take into consideration bank holdings in treasury bills and government bonds, eased 5.5 percent month on month. However, net foreign assets held by the Saudi central bank slipped off record levels in February. The slight SR2.8 billion drawn down in foreign assets corresponded with a sharp rise in oil prices, indicating that the government could turn this year to foreign assets again to support its budget. SAMA's net foreign assets edged down SR2.8 billion, or 0.2 percent, to SR1.67 trillion ($444.14 billion) in February. The decline resulted from a 6.8 percent month-on-month decrease in SAMA deposits held with banks abroad, which fell to SR318.8 billion from SR341.95 billion in January. By contrast, investments in low-risk low-yield foreign securities climbed 10.7 percent year on year to SR1.22 trillion.
