03/09/2015 05:06 AST
In early August 2015, the Saudi government issued SR20 billion in local currency debt subscribed by public institutions and local banks. The bonds were issued across three tranches with five-year (1.92 percent yield), seven-year (2.34 percent yield), and 10-year (2.65 percent yield) maturities.
The issuance followed a SR15 billion private placement with non-bank Saudi financial institutions in July. Looking ahead, Standard & Poor understands that the government is likely to continue issuing debt on a monthly basis under this local currency program to finance its burgeoning fiscal deficit, according to Middle East And North Africa Sovereign Rating Trends Mid-Year 2015, published July 13, 2015, on RatingsDirect.
In this Credit FAQ, Standard & Poor’s addresses some of the questions from investors and other market participants about the implications of this local currency issuance on the local banking system.
Saudi Arabia has one of the most liquid banking systems in the Gulf, S&P said.
It added: “We believe the banks will accommodate government issuance through a gradual shift from low-yielding, short-term liquid assets and private sector credits to higher-yielding, longer-term government exposures. We expect this shift to be positive for the banks' net interest margins (NIMs) and revenue generation.
“We also expect corporate bank loan pricing in Saudi Arabia to increase as the sovereign issuance absorbs the excess liquidity in the banking system. We've already seen the beginning of this trend in the three-month Saudi Interbank Offered Rate (SAIBOR): Over the past 90 days, the three-month SAIBOR has widened by nine basis points (bps).
“We believe the Saudi banking system is ready to accommodate sizable government issuance in case of sustained low oil prices. The system's stock of short-term liquid assets (cash, statutory deposits with Saudi Arabian Monetary Agency (SAMA), deposits with banks, and T-bills was about $106 billion, or 18 percent of the banking system's balance sheet, at the end of June 2015,” S&P said.
“Additionally, Saudi banks hold substantial non-statutory deposits at SAMA ($13 billion, 2 percent of total assets). While the banks will need to maintain a certain portion of their allocation in short-term liquid assets, we believe through balance-sheet reshuffling they have adequate liquidity to comfortably fund $75 billion-$100 billion or more in sovereign issuance in 2015-2016 without much effect on their overall balance-sheet,” it added.
The banking system operates with a deposit base of about $440 billion, which represents a loan-to-deposit ratio of 81 percent at June 30, 2015, one of the lowest metrics in the Gulf region.
On the same date, the total asset base of the banking system stood at $590 billion, while its equity base was $80 billion.
“In addition, because the sovereign exposures will carry zero capital charges under Basel, we contend that the additional sovereign exposures that the banking system is likely to carry will not pressure the capitalization of the banks,” it added.
This is not the first time Saudi banks would carry large sovereign exposures. Before the rise in oil prices to more than $100 per barrel, which began in the early 2000s, the Saudi government had an active issuance program and sovereign exposure was an important asset class for the country's banks.
During this period, Saudi banks reallocated their maturing government and quasi-government exposures to private sector credit exposures, as well as to short-term liquid assets.
We expect deposit growth to slow down in the coming quarters due to low oil prices and we expect banks' significant liquidity buffers to gradually tighten.
Cash and statutory deposits with SAMA, deposits with banks, and T-bills represented 22.1 percent of the banking system's total balance sheet at Dec. 31, 2014. This ratio declined to 18 percent at the end of June 2015.
Arab News
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