Slow­ing de­posits to hurt credit qual­ity of Saudi banks

The Pak Banker - - COMPANIES/BOSS -

The full year re­sults of Saudi banks showed a sharp de­cline in de­posit growth to 1 per cent last year com­pared to 12 per cent in 2014. In the con­text of sharp de­cline in oil prices lower de­posit growth is credit neg­a­tive for Saudi banks ac­cord­ing to credit rat­ing agency Moody's. Oil price de­clined by more than 75 per cent since June 2014 and a 14 per cent re­duc­tion in the 2016.

"Lower de­posit growth will limit banks' ca­pac­ity to lend and re­fi­nance ex­ist­ing bor­row­ers and in­crease bor­row­ing costs, which will re­duce as­set qual­ity and drive in­creased pro­vi­sion­ing costs for banks," said Olivier Pa­nis, Se­nior Credit Of­fi­cer at Moody's. Dur­ing 2010-14, a time of high oil prices, Saudi banks had abun­dant low-cost liq­uid­ity.

As a re­sult, banks in­creased their lend­ing at a com­pound an­nual growth rate of 13 per cent. Ac­cess to non-in­ter­est bear­ing de­posits also im­proved to 51 per cent of to­tal as­sets from 42 per cent, lead­ing to a de­cline in banks' cost of fund­ing to 0.5 per cent in 2014 from 2.1 per cent in 2008, which sup­ported do­mes­tic banks' re­turn on as­sets of 2 per cent as of June 2015.

Moody's pro­ject the Brent price will av­er­age $33 per bar­rel in 2016 and $38 in 2017. The per­sis­tently low oil price is lead­ing the Saudi govern­ment to re­port ma­te­rial fis­cal deficits of 15 per cent in 2015 and a pro­jected 12.7 per cent in 2016.

"Deficits will re­sult in less govern­ment spend­ing, a key en­gine of the Saudi eco­nomic growth, which in turn will con­trib­ute to a soft­en­ing of Saudi Ara­bia's non-oil real GDP growth, which we fore­cast will fall to 2.8 per cent in 2016 from a 5.7 per cent av­er­age dur­ing 2010-15. Con­se­quently, we ex­pect lower prof­its and sav­ings from the pri­vate sec­tor to flow into the bank­ing sys­tem," said Pa­nis.

Data shows be­tween June and Novem­ber 2015, pri­vate-sec­tor de­posits fell by 3 per cent.

The deficits are also driv­ing the govern­ment to draw on its re­serves and de­posits, and in­crease debt is­suances, which were mostly sub­scribed by au­ton­o­mous govern­ment-re­lated en­ti­ties in2015. Th­ese two fac­tors ex­plain the re­duc­tion in pub­lic-sec­tor de­posits placed with banks. Time and sav­ings de­posits from th­ese sources fell by 13.6 per cent year-to-date as of Novem­ber 2015.

Moody's ex­pect banks' muted de­posit growth to mod­er­ate lend­ing growth, with over­all loan growth in 2016 fall­ing to 5 per cent, the low­est since 2010, from 8 per cent in 2015.

The de­posit-growth slow­down is also in­creas­ing banks' cost of fund­ing, which reached a floor in 2014. While the non­in­ter­est-bear­ing de­posits are ex­pected to re­main the main source of fund­ing, their pro­por­tion is seen grad­u­ally de­creas­ing in favour of more ex­pen­sive term de­posits and long-term bor­row­ing. Com­bined with the pos­si­bil­ity of ris­ing in­ter­est rates in line with US rates banks will pass on the in­creased cost to the bor­row­ers. This will help sta­bilise banks' prof­itabil­ity, but in­crease cus­tomers' bor­row­ing costs.

Moody's ex­pect a surge in cost of bor­row­ing bor­row­ings to re­sult in in­crease in the ra­tio of non­per­form­ing loans to gross loans in­creas­ing over the next 12 months to 2.5 per cent from 1.4 per cent as of June 2015 and pro­vi­sion­ing costs to grad­u­ally in­crease.

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