First and foremost, the banking sector is among the healthiest in the world. This is not because bankers in Saudi Arabia are prudent or smarter than others but because SAMA has regulated banks appropriately and correctly. If we had a banking crisis in Saudi Arabia, the reputation of the banking system would have been negatively impacted. The watchful and careful eye of SAMA has proven to be an asset for the banks operating in Saudi Arabia.

In fact, SAMA has been the enforcer of liquidity and capital adequacy ratios when others around the world, prior to the global financial crisis were criticizing SAMA for being an over-burdening regulator. SAMA’s ability to “stick to its guns” proved correct, resulting in a banking system that the world has much to learn from Saudi Arabia.

Loan to deposit ratio for the Saudi banking system is now at 78 percent, UAE 104 percent, Qatar 110 percent, Oman 108 percent and Kuwait 89 percent. Saudi banks have not overextended themselves during the past few years and when banks in other parts of the Gulf were lending exuberantly, Saudi banks were being stringently watched by the regulator. Saudi Arabia is a testament to this. The loan book of Saudi banks is the healthiest in the Gulf. Non-performing loans in 2009 were among the lowest: Saudi Arabia’s Non-performing loans were at 1.1 percent, Qatar at 1.1 percent, followed by the UAE at 1.3 percent. However it is important to note that the coverage ratio on Saudi Arabia’s NPLs is at 165 percent, which means that banks have more cash set aside to non-performing loans, than Qatar which has a coverage ratio of 82 percent. Also important to note is that Saudi Arabia’s corporate penetration was among the least leveraged in the region as a result of SAMA’s strict attitude and single-lending limits caped at 25 percent of the equity of banks.

In 2008 corporate penetration to non-oil GDP was at 95 percent in Saudi Arabia, 144 percent in the UAE, 125 percent in Qatar and 145 percent in Kuwait. Finally, data dissemination by SAMA has been timely compared to that of the rest of Gulf. Banking and monetary statistics in Saudi Arabia are published on a monthly basis on the previous month’s data. Although there has been an improvement on the way banking data is being disseminated, there is still a time lag. The UAE is now publishing banking data since November 2009 whereas SAMA has released data of February 2010.

Besides banking and the regulatory environment, the economy of Saudi Arabia despite its challenges, has been able to withstand the global economic crisis better than most. In fact, Saudi Arabia didn’t witnesses any excesses in the real estate market like Dubai, Qatar and even Bahrain. Banks have been little exposed to the real estate market. In fact, real estate and construction loans to total loans were only 7 percent in Saudi Arabia in 2008, at the height of the real estate bonanza in the UAE, in contrast to Qatar 20 percent, UAE 32 percent and Kuwait 33 percent. Saudi Arabia’s economy has embarked on a $400 billion spending program in 2008, running through 2013. Its commitment in spending has been proven so far, as it has spent close to one-third of what it has announced so far. Saudi Arabia is also able to use its huge foreign assets which are now at 111 percent of its 2009 GDP, to support its spending program. But here the issue is again that the money was saved and not invested in assets that have been devalued.

Also, Saudi Arabia has no government external debt. External debt is an issue rating agencies take note of. Saudi Arabia’s government debt is all domestic, held by Saudi banks or government institutions. And government debt is being paid off by the government. From the more than 105 percent of GDP in the 1990s, government is estimated to reach 13.2 percent in 2010. It is for all those reasons that have maintained Saudi Arabia’s ratings at a very high level. That is a huge accomplishment when governments are piling up on debt to stimulate their economies. The only external debt that Saudi Arabia has is corporate and household debt which as of 2008 was 19.6 percent, Kuwait 23.6 percent, UAE 38 percent, Qatar 67.7 percent and Bahrain 180.5 percent.

Saudi Arabia also has important growth drivers that differentiate it from the rest of the region. Population is now at 25 million and growing fast at more than 2.3 percent per year. More importantly, two-thirds of the population is under the age of 30 years. The young population is likely to be a big catalyst of housing demand in the coming years. The rest of the Gulf has relatively small population with much smaller domestic markets. There is a clear differentiation taking place amongst Gulf economies: Saudi Arabia is the healthiest of the Gulf economies followed by Abu Dhabi and then Qatar.

Finally, Banque Saudi Fransi’s successful bond issue would not have been possible if the macroeconomic situation was not good and the banking sector was not healthy.

BSF is a representative of the healthy standing of Saudi Arabia’s economy and it is noteworthy that BSF has continually made profits every year since its founding.

BSF’s credit rating is one of the highest amongst the 12 Saudi banks. Based on its performance and its credit risk profile, BSF qualified for Investment grade by Fitch as of 2002. Since then, its credit ratings have never ceased to improve as concurred later on by Standard and Poors and Moody’s who upgraded the Bank to Aa3 mid February 2010.

During 2009 the bank maintained very low NPLs, at 1.27 percent in 2009, while strengthening its Capital adequacy (from 11.6 percent to 13.7 percent, end of December 2009) and producing a very healthy return of Equity at 16.6 percent.

The reason for issuing the bond was not to increase the bank’s liquidity as Saudi banks are awash with liquidity. It was to strike a balance between dollar assets and liabilities. The Saudi banks that follow BSF will find easier to plot their bond pricing strategy as the stage has been set. BSF’s bond was priced at 175 at mid swaps, below National Bank of Abu Dhabi’s recent bond, priced at 178. More importantly, 60 percent of BSF’s bond was subscribed by international investors, of which 35 percent were located in Europe, and 40 percent covered by Saudi institutions. Not to also ignore that the secondary market for any bond is an important test case for global appetite. At the time of this publication, BSF’s bond was trading at 160 points versus 171 for the National Bank of Abu Dhabi’s bond. This demonstrates that global investors are beginning to differentiate the Gulf economies and Saudi Arabia is priced more competitively than any other country in the region.

(John Sfakianakis is group general manager and chief economist at Banque Saudi Fransi, Riyadh)

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