Credit to Saudi Arabia’s private sector expanded 15.9 percent year-on-year (1.4 percent month-on-month) in June compared with 16.5 percent year-on-year (1.3 percent month-on-month) in May. In nominal terms, banks increased their credit portfolio by SR13.9 billion in June compared with SR12.8 billion the previous month. Loans, advances and overdrafts combined to make the largest contribution (15.7 percentage point) to the year-on-year credit growth in June. Total claims on the private sector, which include investment in private securities, expanded 1.4 percent month-on-month in June leading to a year-on-year growth of 16 percent compared with 16.5 percent the previous month., according to a report by Jadwa Investment.

“We expect growth in credit to the private sector to expand further this year (16 percent year-on-year), although with a smoother trajectory than we saw last year (16.4 percent year-on-year). On this basis, we expect the incremental increase in bank credit issued to the private sector to reach SR154 billion in 2013 compared with SR135.7 billion last year and close to an all-time high record of SR155.3 billion in 2008,” Jadwa said in its report.

Expansionary government fiscal policy and rising disposable income are expected to be the main growth driver, while regional geopolitical risk and external economic environment present a downside risk on general market sentiment, hence on credit growth. Year-to-June, long-term credit expanded by 17 percent compared with a contraction of 4 percent for the same period last year. As a result, the share of long-term credit to total credit improved to 28.5 percent in June compared with 24 percent a year earlier. Medium-term credit should also improve given the government's expansionary current expenditures, gains in Saudi public and private sector employment and the positive outlook for the housing market development. As such, medium term credit expanded by 21 percent year-on-year in June while its share of total bank credit improved from 17.8 percent in June 2012 to 18.6 percent in June 2013.

The Jadwa report said growth of bank claims on government remained positive in June owing to higher investment in treasury bills, while banks holding of development bonds trended slightly up. Commercial banks added SR3.7 billion to their treasury bills holding in June leading to a total holding of SR178 billion or 31.6 percent higher than a year earlier.

“We expect SAMA to gradually increase treasury bill issuance as government bonds mature and banks remain liquid. In fact, banks prefer to hold treasury bills which generate higher returns than their excess deposits at SAMA. Banks holding of development slightly increased by 1.8 percent month-on-month in June, but remained 18.6 percent lower than a year earlier,” Jadwa said.

Bank deposits as a main source of bank funding in the Kingdom maintain a solid expansion with a double-digit annual growth in the last two years and into this year. In June, however, the deposit growth slowed to 14.4 percent year-on-year (-0.3 percent month-on- month) from 16.7 percent year-on-year in May. In nominal terms, bank deposits slipped by SR3.6 billion in June with deposits in foreign currencies accounting for most of the contraction while demand and saving deposits maintained a positive growth. As monthly growth in credit to private sector and non-financial government entities remained positive (1.3 percent) in June while deposits contracted (-0.3 percent), the system-wide loan-to-deposit ratio increased from 80.3 percent in May to 81.5 percent in June, the highest level since February.

At the same time, three-month Saibor continued on a downward trend after the January peak of 0.9975 percent to 0.9613 percent on July 28.

The expansion in credit and low funding costs continue to contribute to a pick-up in bank profits. In June, banks recorded a profit of SR3.3 billion, the highest monthly profit since January 2012, taking the year-to-June profit to SR17.7 billion. “Based on an expected solid path for credit growth and low funding costs, we expect this year's bank profits to surpass the all-time high of SR34.7 billion recorded in 2006,” Jadwa said in its report.