Following a brief slowdown, loan growth is on the rebound as high government spending coupled with rising domestic demand is leading to substantial increases across the industrial spectrum.
According to a study by EFG Hermes, the kingdom’s banks are in the process of shifting gear as corporate credit and investment banking becomes the key focus area rather than consumer loans.
This is expected to be the trigger for a double-digit credit growth cycle for the banks.
Corporate credit is likely to be the key driver for banks in the medium term, with much of it being absorbed by infrastructure spending and industrial expansion.
The development of mortgage financing laws could also potentially provide strong further impetus to loan growth.
The study has analysed nine of the kingdom’s twelve banks including Islamic institutions Al Rajhi, Al Bilad, Al Jazira, three joint ventures; Saudi British, Saudi French and ANB as well as local banks Samba, Saudi Hollandi, Riyad and Saudi Investment Bank.
The continually improving financial position of the government is said to have reflected itself on the balance sheet of the banking sector through a rise in government deposits, which have almost tripled in the last five years.
Also prevalent is a reduction in public debt levels which declined to 19% of GDP by 2007 compared to 120% of GDP in 1998.
This has freed up liquidity in the system and increased private sector access to funding from the banks.
Total exposure of listed banks to North American investments, investment and non-investment grade combined stood at less that 5% of total assets. While there is indirect exposure through externally managed funds, EFG’s study does not expect any major surprises going forward.
The Saudi banking sector is said to be in the midst of a structural upturn which is expected to be the beginning of a cycle of strong credit growth for the banks, driven by the economic diversification and supported by the government and rising domestic demand.
Declining public debt levels have provided a boost to the banking sector by freeing up liquidity to be channelled to the private sector.
Over the last 18 months projects amounting to $380bn have been announced by the government and the study sees a shift in loan books to a longer maturity profile. This comes as banks aggressively participate in the booming project finance business built on the massive industrial expansions planned over the next five years.
The kingdom’s banking sector, while entering an optimistic new era, does face increased international competition though as a result of membership of the World Trade Organisation.
Accession has ensured that, and Saudi banks now face competitive pressure from regional and international banks, whether these have a presence in the kingdom or not.
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