Interpreting Middle East Economic News and Analyzing Market Trends

… Meanwhile, Saudi banks suffer from too much cash

It’s a terrible time to be a bank in the Eurozone.  Countries in southern Europe are stuck in a depression, banks all over Europe are stuck with too much bad debt, and recently a major loss of confidence after the public theft of Cypriot depositors.  Banks in Saudi Arabia, on the other hand, face a different challenge: what to do with all that cash?

 

The depositary base of Saudi banks reached SAR1.27tr in January ($338.7 billion), an increase of 13.7 percent on January 2012. Demand deposits have increased their share to 60.2 percent, with an annual gain of 15.5 percent.

Demand deposits from individuals also rose 11.9 percent year on year, while government entities’ demand deposits grew 87.8 percent.

Time and savings deposits increased by 9.1 percent year on year during January to reach SAR323.4bn ($86.24 billion), and other quasi-monetary deposits increased 14.9 percent as foreign currency deposits expanded by 12.8 percent during January.

The combined loans portfolio of Saudi banks rose during January to SAR1.01 trillion ($269.3 billion), setting an annual rate of 16.3 percent year on year for the month.

The report added that medium and long-term credit is outpacing short-term credit growth. Medium-term credit grew by 41.6 percent annual, reaching SAR196.9bn ($50.5 billion), and long-term credit raised its share of total credit to 26.8 percent with a 16.5 percent growth. Short-term credit still represents the largest part of credit, with a share of 53.7 percent, with a growth of 9.2 percent.

The report noted that the growth of lending has outpaced deposits, contributing to the rise of the loans-to-deposits ratio to 79.9 by the end of January.

Read the full story from Arabian Business.

 

While deposits from individuals rose nearly 12%, deposits from government entities grew at nearly 88%.  This increase is due to rising oil revenues.  In addition, loan growth in Saudi Arabia has been rising faster than deposits, which is now putting pressure on banks to reign in loan growth to avoid over-heating the economy.  Having too much cash is also causing Saudi deposits at foreign financial institutions to grow as well as foreign bond holdings:

 

Saudi Arabian Monetary Agency (Sama) saw its investment in overseas bonds and shares soar to SR1.7 trillion ($453.2 billion) by December 2012, thus registering a 21 per cent growth over the previous year, said a report.

This accounted for 70 per cent of the Saudi central bank’s total assets which ballooned to SR2.49 trillion ($664 billion) in January this year, SR13 billion ($3.47 billion) more than that of December 2012, thus reflecting the strength of the Kingdom’s economy, said a Arab News report.

Sama’s foreign asset base underwent a significant expansion owing to oil-related foreign exchange inflows accrued to the Saudi government in recent years, the report stated.

Its deposits with banks operating outside the Saudi territory increased by 20.4 per cent in 2011 to hit SR414 billion ($110.4 billion) from SR343.9 billion (91.7 billion) in 2010.

The Saudi agency’s investment in foreign securities surged considerably by 20.8 per cent to hit SR1.4 trillion in 2011 ($373.3 billion) compared with a rise of 10.3 per cent the previous year. The currency cover rose by 24.3 per cent to SR169 billion ($45 billion) in 2011 compared to a rise of 10.5 per cent in 2010.

The balance sheet of Sama continued to show expansion primarily on account of significant oil revenues and public spending in recent years, said the report.

The net foreign assets of the banking system shot up by 22.3 per cent to hit SR2.1 trillion ($560 billion) in 2011 against a rise of 7.3 per cent in 2010.

Read the full story from Tradearabia.com.

 

The rising deposits from individuals in Saudi banks is an indication of their confidence in their banks.  It could also be a sign of caution as these depositors look to safety in uncertain markets.  The excess cash in the Saudi banking systems needs to flow somewhere.  At the moment, it has lead to loan growth rising at a faster pace than deposit growth.  It also means that Saudi banks and government are deploying more and more cash overseas since investment options are limited at home.  Foreign bonds (i.e. US Treasuries) are a natural choice for the government, but foreign assets in the banking system are also rising at a fast pace.  These assets are held in the form of deposits at foreign banks as well as short-term instruments. 

 

Given what has happened in he Eurozone over the past two weeks, it is easy to conclude that Saudi cash (among other foreign money) is re-considering where it is parked.  My guess is that there is a shift right now out of European banks into American and Asian banks.  Over the next few months, we will see if this is the case.