Saudi loan demand to stay weak in 2017: BMI Research

Credit demand in Saudi Arabia’s commercial banking sector will remain subdued in 2017, weighing on lenders’ profitability despite easing liquidity conditions in the Kingdom, BMI Research said in a recent report.

“Commercial banks will continue to navigate a challenging operating environment over the next two years, owing to the weak macroeconomic backdrop,” the consultancy said.

Saudi Arabia’s economy has been severely hit by the plunge in oil prices around mid-2014, which led to large-scale cutbacks in government spending. 

With crude prices expected to stay low, the Kingdom’s economic growth is forecast at zero percent in 2017 and 1.6 percent in 2018, creating a tough operating environment for commercial banks.

Moreover, weak confidence in the economy will continue to exert downward pressure on credit demand in the private sector.

Accordingly, BMI Research forecasts assets at commercial banks to expand by a compound annual growth rate (CAGR) of 3.6 percent over 2017-2021, well below the CAGR of 7.9 percent over 2012-2016.

Meanwhile, liquidity conditions in the Saudi banking sector are easing and will continue to improve throughout the rest of 2017 and 2018.

Commercial banks suffered a severe liquidity crunch last year due to a combination of lower government revenues and delayed government payments to contractors, which weighed on private sector deposits.

However, the Kingdom’s liquidity has improved significantly since the issuance of a $17.5 billion bond in October last year, as well as repayments to contractors in the last months of 2016.

Saudi Arabia’s three-month inter-bank rate has also fallen by around 60 basis points since October 2016, indicating improving liquidity.

“Over the coming months, we believe that continued government international borrowing and higher oil prices will support liquidity in the banking sector, although we do not expect a return to pre-slump growth levels,” BMI Research said.