News Column

Suppressed interest rate environment and Tadawul's surge

August 25, 2014


There is no doubt that Saudi banks are well positioned to support the development agenda of the Kingdom. Even then, it is becoming increasingly clear that other solutions are needed. In that sense, the development of Saudi capital markets, especially sukuk, in recent years is encouraging.

Saudi banks are at ease expanding the maturity curve with minimal risk due to the stronger capital requirements set by Saudi Arabian Monetary Agency. In this context, more diversification should offer new investment opportunities to maintain the growth levels of their credit portfolios.

It is a fact that growth in the depository base continues to provide opportunities to expand the financing capabilities of Saudi banks.

The recent data of National Commercial Bank indicates that the depository base reached an all-time high at SR1.5 trillion, increasing 12.7 percent on an annual basis by the end of June.

Banks' total deposits have been growing at double digits for the past couple of years as oil prices remain elevated and supportive of a liquid economy.

The majority of deposits are demand-based with a share of 62.8 percent as they climbed 14.1 percent Y/Y during June.

Businesses and individuals hold 93.8 percent of demand deposits while government entities make up the remaining 6.2 percent.

This data highlights the fact that the operating environment of Saudi banks remains benign. The appetite for deposits as a saving product remains strong, which is partly reflective of the strong performance of the overall economy.

For Saudi banks, this continued influx of deposits represents a low-cost source of funds, especially as many demand deposits pay no return to the account holder.

The greater challenge going forward is, of course, the fact that demand deposits are not necessarily very sticky. Changes in the economic environment could quickly slow down or even reverse the influx.

This is particularly problematic at a time when the demand for loans is in many areas increasingly long-term with the high or growing importance of areas such as project finance and mortgage lending.

The government's time and savings deposits have increased by 28.4 percent, adding SR33.7 billion YTD to reach SR183.7 billion in June.

Opting for yielding assets reflects the willingness to utilize resources.

On the other hand, businesses and individuals are more inclined toward riskier alternatives given that their level of time and savings deposits stagnated at SR176.5 billion, an annual gain of 0.1 percent.

The suppressed interest rate environment is unable to lure investment capital, especially as Tadawul is on track to test the 11,000 level.

More expert studies are needed to suggest solutions for overcoming such challenges.

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Source: Arab News (Saudi Arabia)

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