Saudi tweaks loan deposit policy to allow more lending

DUBAI / Reuters

Saudi Arabia’s central bank has instructed banks to change the way they calculate their loan-to-deposit ratios, giving greater weight to long-term deposits in order to permit more lending, according to a report on the Maaal financial news website.
The new rules, set to come into effect in early April, will introduce a weighting system for calculating a bank’s deposits, ranging from 100 percent for the face value of deposits on demand to 190 percent for deposits of over five years, Maaal quoted unnamed sources as saying.
The kingdom’s maximum loan-to-deposit ratio for commercial banks will remain at 90 percent, said the report, but by increasing the value of deposits in the calculation, the new system will give more room for loans to increase. The Saudi central bank did not immediately respond to a request for comment on the Maaal report.
It last raised the loan-to-deposit ratio in February 2016, to 90 percent from 85 percent. The current industry-wide ratio is well below the ceiling, at 79.9 percent in January, because of low loan demand due to slow economic growth.
But authorities hope to speed up growth this year and in coming years by boosting government spending and providing incentives for the private sector to invest.
The new system may encourage banks to do more to reverse a relative decline in their long-term deposits. The ratio of their time and savings deposits to total deposits sank to 26.4 percent in January from 29.4 percent a year earlier.
RATE GAP
Saudi Arabia has narrowed the difference between a key rate and its US dollar equivalent in London, days before the Federal Reserve is due to set monetary policy.
The three-month interbank rate has climbed 16 basis points this week to 2.18 percent, curbing its discount to Libor to about two basis points after the Saudi Arabian Monetary Authority unexpectedly raised both its repurchase and reverse repurchase rates.
Saudi Arabia typically follows US monetary policy because its currency is pegged to the dollar, but it increased its key rates less than a week before the Fed is due to raise borrowing costs.
Historically, Saibor has been higher than Libor — by more than 150 basis points as recently as 2016. That changed this year amid ample liquidity in the banking system and relatively slow credit growth. Saibor was 19 basis points below its US dollar equivalent, the biggest gap in a decade.
“The current move by SAMA is likely to have been driven by a need to ensure the appeal of the Saudi riyal in an environment of generally tightening monetary conditions in the developed world,” said Anita Yadav, the head of fixed-income research at Emirates NBD PJSC, the United Arab Emirates’ second-biggest bank.
More specifically, the risk of allowing the discount to widen is that it could lead to capital outflows or a shift in deposits to dollars from Saudi riyals, Monica Malik, chief economist at Abu Dhabi Commercial Bank, wrote in a report on March 16. While the central bank is unlikely to boost borrowing costs this week, it may raise its benchmark rates two more times in 2018, according to Malik.
Saibor has risen 28 basis points so far this year, compared with a 51 basis-point advance in Libor.