OREANDA-NEWS. The relaxation of loan-to-deposit ratio limits for Saudi Arabian banks, announced on 14 February, is in response to liquidity tightening in the banking sector, says Fitch Ratings. The central bank increased the maximum loan-to-deposit ratio to 90% from 85% to free up liquidity, allowing banks to grow lending and invest in additional government bonds. The government plans to boost issuance of securities in the local market in 2016 to fund a growing public-sector deficit.

Saudi Arabian banks are largely deposit funded and the new 90% limit will still mean that they operate with some of the lowest ratios among Gulf Cooperation Council (GCC) peers. With the exception of Bahrain, other GCC banking sectors work with loan-to-deposit ratios at or in excess of 100%.

The banking sector is growing, with assets up 3.6% in 2015, but this is a slow pace of growth compared to the 11.4% annual average reported over the past three years. A tightening of liquidity in the Saudi banking sector is reflected in a shift in the composition of both assets and liabilities.

The asset mix is shifting. Loans rose slightly to 61.6% of sector assets at end-2015, from 58.6% at end-2014 and the proportion of liquid assets shrank. Liquid assets - comprising cash and cash reserves, largely placed with the Saudi Arabian Monetary Agency (SAMA), plus SAMA securities, government and private sector bonds and interbank placements - represented just 15.6% of assets at end-2015, down from 22.3% at end-2014. This reflects a sharp reduction in holdings of SAMA securities, a strong increase in government bonds, albeit from a low base, and a sharp increase in interbank placements, but also from a small base.

On the funding side, deposit growth slumped to just 1.9% in 2015 compared with 12.4% in 2014. Private-sector deposit growth was weak, but still positive. But public-sector deposits shrank, albeit at a marginal 1.5%, for the first time in many years. The contraction in public sector deposits was more pronounced in local-currency deposits (down 7%) as dwindling oil revenues meant that government agencies had to access cash reserves to settle immediate overheads.

Demand deposits that are non-remunerated fell back only slightly during the year, representing 60.8% of total deposits at end-2015 (end-2014: 62.8%). However, rated banks tell us that funding costs are rising as liquidity tightens. Three month SAIBOR rates paid on local-currency deposits in December 2015 reached 1.3%, well above the 0.9% rate paid at end-2014.

Our 2016 outlook report for GCC banks, available by clicking on the link below, warned of tightening liquidity, slower loan growth and a tougher operating environment for Saudi banks. The banking sector outlook and the rating outlooks for seven Saudi banks are negative, as is our outlook for the sovereign rating.

The latest sovereign report is also available by clicking on the appropriate link below.