Prior to Aramco IPO, High liquidity with Saudi banks

Saudi Banks feature high liquidity prior to Aramco IPO

The ratio of loans to deposits with banks operating in Saudi Arabia at the end of August was 78.2%, compared to 79.2% at the end of July, and 79.7% in August 2018, which means a decrease of 1.0 p.p. during the month and 1.5 p.p. during the year.

According to an analysis, based on data from the Saudi Arabian Monetary Agency (SAMA), this rate is convenient for banks in Saudi Arabia, and allows them to grant more loans, where they have about 11.8% to reach the maximum loan-to-deposit ratio of 90%, according to Al-Eqtisadiah newspaper.

The liquidity currently available in the banking sector in Saudi Arabia is convenient to handle the funding expected by individuals and institutions to participate in the Saudi Aramco IPO in the local stock market.

Saudi Aramco Chairman, Yassir Al-Rumayyan announced on Monday that “Aramco IPO is very, very close”.

According to SAMA, the deposits with banks, on which the ratio is calculated, are “demand, time, and savings deposits, repurchase agreements, etc.” plus long-term debt “syndicated loans, bonds, sukuk, sub-loans, etc.” while loans are calculated by calculating loans less provisions and commissions.

Beginning in April 2018, the loan-to-deposit ratio mechanism has been adjusted to stimulate banks to introduce savings products by placing higher weights for long-term deposits.

However, according to simple calculations, the low loan-to-deposit ratio comes in light of higher deposits than the monthly and annual comparisons.

Loans rose 0.1% (SAR750mn) at the end of August to reach SAR1489.9bn, compared to SAR1489.2bn at the end of July. Deposits increased by 1.5% (SAR25.9bn) to reach SAR1.71tn, compared to SAR1.68tn.

Within a year, loans rose 3% (SAR43bn) at the end of last August, from SAR1446.9bn at the end of August 2018, while deposits rose 5% (SAR81.8bn), which was SAR1.62tn at the end of the same month of 2018.

SAMA raised the REPOs rate from 2% at the end of 2017 to 3% by the end of 2018, and the Reverse REPOs rate increased from 1.5% to 2.5% in the same period, in conjunction with the “Federal Reserve” raised interest rates, as a result of pegging the Saudi riyal to the dollar.

SAMA later cut interest rates twice during 2019 (July and September), reaching REPO to 2.5%, and the Reverse REPO to 2% as of last September.

During the analysis period “from the beginning of 2013 until the end of August 2019”, the highest ratio of loans to deposits with banks was about 84.8% recorded in August 2016, while the lowest ratio was 73.9%, and recorded in March of 2014.