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Money in the bank

2 November 2015 By Andy Critchlow

Saudi Arabia is under pressure to prove ratings agencies wrong about its capacity to cope with oil at $50 per barrel. Yet as one tap closes, another opens. A well capitalised banking sector could help the kingdom offset falling oil revenue.

As it downgraded Saudi Arabia’s sovereign credit rating on Oct. 30, Standard & Poor’s warned that the kingdom will have to fall back on its foreign reserves, which could fund deficits for a number of years should weaker oil prices persist. Running down its reserves is one way Saudi withstood an oil price rout in the late 1990s.

Yet the banking sector is a treasure chest waiting to be raided. Saudi lenders’ deposits grew 12.4 percent in 2014 to 1.6 trillion riyals ($420 billion). Although borrowing has steadily increased, bank loans stand at just 79 percent of deposits, compared with a government-imposed limit of 85 percent. That suggests banks have around $25 billion of available reserves, giving plenty of room to lend more into the economy.

The banks can also be brought in to fund the government’s budgets by buying bonds. Capital buffers are high, and earnings increased by 10 percent in 2014. Because Saudi commercial banks have little exposure to foreign assets, they have avoided the worst effects of the financial crisis and recent stock market volatility. This lever has been pulled before. Between 1995 and 2004, Saudi responded to a low oil price by almost quadrupling the banking sector’s holdings of government bonds.

If Saudi Arabia’s finances were to deteriorate further the government could always raise cash by selling stakes in some of the kingdom’s largest banks. National Commercial Bank – the biggest Saudi lender by assets – is almost 80 percent owned by government entities, and has a market capitalisation of $28 billion. Selling bank shares would be a good excuse to open up the stock market a little further to foreign investors.

Using lenders to plug budgetary holes isn’t a decision to be taken lightly. Banks told to lend quickly don’t always lend wisely. But with so much money sloshing around its domestic banks, Saudi Arabia has time and options to prove the ratings agencies wrong.



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