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| The King Abdullah financial district is seen illuminated at night in Riyadh. Bank of America Merill Lynch, HSBC Holdings and Standard Chartered have raised their 2012 growth forecasts for the biggest Arab economy since March, as oil above $100 and credit growth spur expansion of the non-oil economy |
Saudi Arabia’s fastest increase in bank lending since 2009 is helping boost the oil exporter’s economic growth outlook as banks start to let down their guard three years after the region’s biggest corporate default.
Bank of America Merill Lynch, HSBC Holdings and Standard Chartered have raised their 2012 growth forecasts for the biggest Arab economy since March, as oil above $100 a barrel and credit growth spur expansion of the non-oil economy. Higher loan demand has led the premium of Saudi borrowing costs over US rates to more than double this year.
Saudi bank loans to private businesses grew 12.1% in the year to February, the most since March 2009 - just months before two Saudi family holding companies defaulted on at least $15.7bn of loans. Al Rajhi Bank last week posted its strongest first-quarter profit growth in six years, with net income at the kingdom’s biggest lender by market value jumping 18% and topping analysts’ estimates.
“We are at a point where banks are moving from the risk- management mode to the renewed-growth mode, so they are eager to mobilise their resources, eager to go to the market again and start making money again,” Jarmo Kotilaine, chief economist at Jeddah-based National Commercial Bank, the largest Saudi bank by assets, said by phone yesterday. “This is a sweet spot for them.”
The three-month Saudi interbank offered rate known as Saibor, used by banks use to price loans, rose for a sixth week to 0.88938% on Sunday, the highest level since May 2009. Saibor’s spread over the three-month London Interbank Offered Rate more than doubled this year to 42 basis points on Sunday, the most since June, data compiled by Bloomberg show.
Bank loan growth is recovering from a slowdown in 2009 and 2010 when Ahmad Hamad Al Gosaibi & Brothers Co and the Saad Group, the business owned by Saudi billionaire Maan al-Sanea, defaulted after borrowing from about 80 banks. The shock prompted Saudi banks to take provisions for non-performing loans and apply greater caution to new credit applications.
Cumulative bank profitability dropped annually between 2007 and 2010, data of the Saudi Arabian Monetary Agency show. The economy expanded 0.1% in 2009, the slowest pace in 10 years, data compiled by Bloomberg show.
The credit pick up this year comes as the government embarks on investment programmes valued at more than $500bn to build infrastructure, industry and homes, as well as create jobs. Oil prices have also buoyed the revival. Brent crude is up 13.5% this year to $121.83 a barrel on April 13.
Lending to the private sector, adjusted for inflation, may expand 10.2% this year, the second-biggest increase in the six-nation GCC after Qatar, HSBC economists Simon Williams and Liz Martins said in a report released this month. They also raised their forecast for gross domestic product expansion to 4% from 2.9%.
EFG-Hermes Holding, the biggest publicly traded Arab investment bank, raised its economic growth forecast to 5% in March from 3% earlier to reflect higher oil production to compensate for international sanctions on Iran.
“We see the focus of the central bank is to ensure that there is ample liquidity in the banking sector, with the developments in Europe,” Monica Malik, Dubai-based chief economist at EFG-Hermes, said by phone on Sunday. Monetary data “point to a strong liquidity position of Saudi banks, despite the accelerating loan growth,” she said.
The nation’s loan-to-deposit ratio is among the lowest in the Gulf Cooperation Council at just above 80%, according to Bloomberg News calculations based on central bank data. The ratio exceeds 100% in Qatar, the UAE and Oman.
Bank of America Merill Lynch raised its GDP growth forecast to 5% from 3.3%, while Standard Chartered lifted its estimate to 4.7% from 2.9%. The economy will expand 6% this year, Finance Minister Ibrahim al-Assaf said in January.
A surge in credit to “uncomfortable levels” would prompt the central bank to sell more treasury bills and pay higher yields, Jean-Michel Saliba, a London-based economist at Bank of America Merill Lynch, wrote in an April 1 report. He deemed this scenario unlikely.
Credit growth had accelerated to as much as 35% in mid-2008, pushing inflation to a three-decade high of more than 11%. Consumer prices rose 5.4% in February, the highest in 15 months. The yield on one-year treasury bills advanced six basis points in March to 0.58%, the biggest monthly gain since Bloomberg started tracking the data in April 2010.
The kingdom, which pegs its currency to the US dollar at 3.75, sells treasury bills at weekly auctions on Mondays. At last week’s sale, the yield on one-year notes was 0.57%, up less than one basis point. Yields on six-month and three- month securities also advanced.
Trading in Saudi-riyal forward contracts indicates the implied three-month interbank lending rate rose for the first time in four days, climbing 0.7% to 0.4074% on April 13. The rate reflects the actual cost for banks to lend to one another. One-year interest-rate swaps, the fixed rate needed to receive floating payments for one year, was unchanged yesterday at 0.9197%.
There is scope for Saudi banks to boost lending as they offer more loans to small-and medium-sized companies, NCB’s Kotilaine said. The kingdom wants to support small companies to reduce youth unemployment, which was 27% of the labour force aged 20 to 29 in 2009, data of the Central Department of Statistics and Information show.
Consumer lending is also garnering more attention from Saudi banks. Loans to individuals to buy real estate, cars and other goods expanded 21.8% in the fourth quarter, the most in more than three years, central bank data show.
“What we are seeing is that in some ways banks are expanding into relatively new areas,” Kotilaine said. “We have seen fairly significant growth in SME lending, which is very much aligned with the needs of the economy, but from the bank lending perspective it’s relatively uncharted waters.”