The Saudi banking sector would experience "sluggish" growth throughout the third quarter of 2012, the National Commercial Bank said in its August 2012 "Saudi Economic Review". It also forecast that M3 - the broadest measure of money supply that includes M2 as well as all large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets - would post an annual growth for 2012 at 10.9 percent, a more conservative figure than the International Monetary Fund's (IMF) 12.2 percent projection. M3 growth remained well below 2011's performance, recording 9.8 percent Y/Y during June. However, it rebounded from May's growth of 7.7 percent Y/Y, driven by demand deposits which gained by 14.4 percent in June over the same month last year. Nonetheless, the level of demand deposits has somewhat stagnated during the second quarter of 2012 on a monthly basis, the report further said. Nonetheless, NCB report said the Saudi economy continues to maintain an upward trajectory and record robust growth figures despite the fragility of the global economy, partially driven by utilizing large amounts of excess liquidity and benefiting from the cautious approach of the financial system last year. The monetary base (M0) recorded its slowest growth as it remained almost stagnant during June with a 0.2 percent annual change, a slight gain of SR510 million, attributed mainly to local banks withdrawing SR10.4 billion from SAMA as their deposits rest at SR120.7 billion, the lowest level this year, the report added. The cash in vault and currency outside banks, which rose by 23.1 percent and 7.5 percent, respectively, on an annual basis due to the Ramadan season, is expected to slow down and pick up again during Hajj. Meanwhile, time and saving deposits have held their positive trajectory for the seventh consecutive month as they expanded by 3.6 percent Y/Y. Despite experiencing suppressed interest rates, the local banking system managed to attract time and saving deposits and increase their share of M3 to 24 percent following their record low figure of 23 percent during April. The IMF recently said "the (Saudi) use of macroprudential and liquidity management tools remains key to effective policymaking". The Saudi Arabian Monetary Agency has steered the Saudi economy through the global financial crisis and is keen on supporting and maintaining the growth of the economy by managing its monetary tools effectively. Following rigorous rules and regulations set by SAMA , deposits are the main component in deriving the level of financing the bank can write on their balances. Local banks have amassed large levels of deposits over the past couple of years and have been rather stringent in lending, the report said, noting that this has pressured the loans-to-deposits ratio to as low as 74.8 percent during April last year. However, toward the end of 2011, Saudi banks have started to utilize the liquid situation and expand their loans portfolios. The pace of growing deposits has decelerated during the first half of 2012, recording a gain of 10.1 percent during June against the same month last year. Following May's relatively modest 7.6 percent Y/Y growth, June's rise was attributed to the sudden surge of other quasi-monetary deposits which are largely composed of foreign currency deposits, the latter expanding in June by 12.1 percent on an annual basis, the report said. The combined loans portfolio for local banks reached an all-time high in June at SR936.7 billion, a 15.1 percent gain over June 2011. During the first half of 2012, banks have increased their balance sheets by SR80.1 billion in fresh lending, almost the same amount for the whole of 2011 which stood at SR81.3 billion. However, NCB report noted that the maturities of the newly added assets differ from last years'. The focus has shifted to medium and short-term credit as oppose to long-term credit. The share of medium term credit has gained to a record 17.8 percent as banks have been drawn to finance SMEs on larger scale to diversify their portfolios. As a result of the pickup in lending activity, the L/D ratio has been supported to reach 80.7 percent for June. The private sector's total claims expanded by 13.9 percent on an annual basis during June. Credit to the building and construction posted the highest growth across all economic activities increasing by 49.4 percent Y/Y to reach SR73.4 billion, validating NCB's Construction Index which reached 309.12 by the end of the second quarter of 2012. The report forecast that the building and construction sector will remain one of the strongest for the next few years as demand is far ahead of current supply levels. Additionally, the services sector posted the second highest growth at 47.1 percent Y/Y, followed by the utilities and health service at 45.6 percent Y/Y. Meanwhile, total claims on the public sector contracted by 8.7 percent Y/Y as the level of treasury bills dropped drastically, which followed the elevated issuances last year in an attempt from SAMA to mop up excess liquidity in the market. As the US Federal Reserve is expected to keep the interest rate at near zero till 2014, Saudi Arabia is likely to echo the decision by maintaining the current policy rate. Currently, inflationary pressures are subdued and price hikes can be handled by nonconventional methods such as adjusting the required reserve requirement, a decision opted by SAMA in 2008. The Saudi interbank overnight rate (SAIBOR) gained marginally but remains under 100bps which creates a very accommodative environment for banks to easily manage cash levels in order to expand their balance sheet items and support local business and the economy as a whole. The Saudi Gazette
