By Innovation-sa on February 8, 2018 in News

The domestic liquidity of Saudi banks has improved and hit a record high SR 457 billion by the end of 2017, despite restrained growth and challenging business conditions in Saudi Arabia, according to Sectoral Comment issued by Moody’s Investors Service on February 1.

The domestic liquid assets of banks in Saudi Arabia saw a growth of 11 percent in 2017 which equaled to 20 percent of bank assets. Moreover, the ratio of reserves to total deposits reached 14.8 percent, it’s highest since 2012.

The contraction of 1 percent in bank loans and 43 percent increase in the bank holdings of domestic government bonds led to a positive trend despite a sluggish 0.1 percent deposit growth.

The Saudi bank’s diminished deposit growth, standing at around 1 percent since 2015, was led by a decline in government balances amid a fiscal deficit due to lower oil prices and a reduction in deposits from the private sector because of government spending cuts, payment delays and weakening economic growth. These developments tightened the banking system liquidity.

However, by late 2016, credit growth decelerated as the government cleared the majority of overdue payments to contractors and this led to slight improvement in liquidity of banks.

Funding squeeze further eased in 2017, when the government increased its recourse to international debt issuance to finance its deficit, supporting a 12 percent increase in public sector deposit inflows to the banking system, versus a 10 percent decline in 2016, which mitigated the 3 percent contraction in deposit volumes from the private sector in 2017.

During 2017, bank loans contracted 1 percent, mainly due to government’s fiscal consolidation measures, which adversely affected economic growth, credit demand, and banks’ lending appetite. Loans for building and construction sector, which are heavily dependent on public spending, declined by around 15 percent.  However, the loan-to-deposit ratio remained stable at 86 percent, after increasing to 87 percent in 2016 from 79 percent in 2014.

In 2017, banks had the opportunity to transfer their excess liquidity to high-quality government investments through successive sovereign debt issuance, notably Sukuk issuance. As a result, government bonds made up 56 percent of Saudi bank’s domestic liquid assets which was only 27 percent in 2015.

Moody’s believes that banks in Saudi Arabia will benefit from the SR 72 billion economic stimulus programme announced by the government to support private sector and that the Saudi economy will recover over the next 12-18 months. With improved liquidity, Moody’s also expects banks in Saudi Arabia to improve lending by around 4 percent in 2018.