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Wed 2 Nov 2011 11:56 AM

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Saudi banks loosen credit lines amid state spending

Banks ramp up lending as $130bn state plan boosts confidence in Saudi economy

Saudi banks loosen credit lines amid state spending
Banks have "had their confidence boosted" by state spending plans, said Paul Gamble of Jadwa Investment Co

Saudi Arabian banks are lending more as government spending boosts confidence in the country’s economy, benefiting companies including Saudi Arabian Mining and Saudi Electricity.

Ten out of 11 Saudi publicly traded banks raised the value of their loan portfolios in the first nine months of the year, according to statements from the banks. Alinma Bank, an Islamic lender, had the largest increase at 75 percent. Bank Al-Jazira followed at 19 percent. Al-Rajhi Bank, the largest lender by market value, and Bank AlBilad had a 12 percent increase each.

King Abdullah announced a $130bn spending plan in the first quarter to build homes and address unemployment of 10 percent as regional protests toppled leaders in Tunisia, Egypt and Libya. The country’s default risk declined to the lowest level in two months after Abdullah chose a successor to Crown Prince Sultan bin Abdulaziz Al Saud, who died Oct 22.

“Both banks and borrowers have had their confidence bolstered by the vast government spending programs,” Paul Gamble, head of research at Riyadh-based Jadwa Investment Co said in a phone interview. “Availability of suitably priced bank credit has become much less of a constraint for the private sector.”

Saudi Arabia’s three-month interbank interest rate, the rate at which banks lend to each other, has risen 11 basis points from its lowest level this year on July 18 to 0.705 percent.

Saudi Arabian Mining, the kingdom’s biggest miners known as Ma’aden, Saudi Electricity and Sahara Petrochemical Co are tapping financing as economic growth increases demand for their products. The Saudi economy will grow will grow 6.5 percent this year, the International Monetary Fund said in August.

Ma’aden said on Oct 16 that its aluminum project with Alcoa obtained financing valued at SR3.72bn from 13 local and international banks.

A day earlier, Sahara Petrochemical said on Oct 15 it signed a bridge loan agreement with Riyad Bank for no more than SR1bn to finance projects.

A $2.85bn Saudi Electricity power project being developed by Acwa Power International and South Korea’s Samsung C&T will have 77 percent of the total cost of the project funded through dollar and riyal debt.

“Banks are now much more comfortable on their asset quality indicators, which is giving them confidence to grow their books,” Murad Ansari, an analyst at investment bank EFG- Hermes Holding, said.

Saudi bank loans and advances to the private sector increased a 9 percent from a year earlier in September to SR798.4bn ($212.9bn), the highest level this year, according to monthly data from the Saudi central bank.

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Lending through the remainder of the year “will continue at a similar pace to this,” central bank Governor Muhammad al-Jasser said in an interview in Kuwait on Oct 31.

“The pace is reasonable at this point.”

“You’re probably looking at an 11 percent annual loan growth for 2011 and 12 percent at best for 2012 unless structural changes occur,” Wael Chalak, senior equity analyst at Audi Saradar Investment Bank, said. “This is already way better than in 2010.”

Banks credit to the private sector increased 4.7 percent last year, according to data on the central bank’s webpage.

Saudi Arabia has been left mostly unscathed by popular uprisings in several Arab countries. As the leaders of Tunisia, Egypt and Libya were toppled, Abdullah, 87 this year, ensured a swift political transition with the appointment on Oct 28 of Nayef bin Abdulaziz Al Saud as crown prince after the death of his predecessor Sultan.

King Abdullah’s cabinet announced in August 2010 a $384bn plan to develop transportation, housing and education. Abdullah also sent troops in March to Bahrain to crush a mainly Shiite-led revolt while Nayef’s security forces prevented dissent at home.

Nayef is unlikely to “change tack dramatically” from the “economic and diplomatic trajectory” set by Abdullah, Gerd Nonneman, professor of international studies and Gulf studies at Georgetown University School of Foreign Service in Qatar, said.

Saudi bank lending had slowed in the previous two years after two family-owned businesses defaulted on at least $15.7bn of loans and the economy was hurt by the global credit crunch.

Bank profits in the third quarter increased 29 percent year on-year, according Jadwa’s Gamble. The higher “lending is helping to lift bank profits,” he said. “Bank lending has risen fairly briskly this year.”

Al Rajhi Bank third-quarter net income climbed 18 percent to SR1.94bn. Saudi British Bank, the lender 40 percent owned by HSBC Holdings, reported a 50 percent jump for the quarter, while Riyad Bank profit advanced 30 percent.

Saudi banks also increased their lending at home because they are “not exposed” to Europe, al-Jasser said in October in Riyadh. “Our lending is domestic, our deposits are domestic.”

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