Saudi bank lending could take a hit in 2023 without liquidity support

Saudi bank lending could take a hit in 2023 without liquidity support

Saudi banks are likely to require further central bank liquidity injections after interbank spreads rose sharply in October and as lending growth continues to outpace deposit growth, Fitch Ratings said in a new report.

Sector loans increased by 12.5% in nine-month 2022, compared with 8% for deposits, loans/deposits ratio (LDR) for Saudi banks collectively to rise to 102.2%, its highest level in at least 15 years, according to Fitch's calculations.

"Without liquidity support, lending growth could be muted in Q4 2022 and our 2023 loan growth forecast of 12% lowered, while banks’ cost of funding will continue to increase."

Three-month SAIBOR-Libor spreads increased to more than 140 basis points (bp) in October from 36 basis points (bp) in September, close to their levels in May of 150bp before the liquidity injection. This compares with a historical average of about 50bp.

SAMA’s support helped bring SAIBOR-Libor spreads down sharply to about 2bp by end-August before they widened again as the US Federal Reserve continued raising rates and lending growth remained strong.

Last month’s increase in 3M SAIBOR-Libor spreads of more than 100bp indicates that liquidity conditions are tightening again. "With markets pricing in further US Fed rate rises by end-1H23, we expect three- and six-month SAIBOR