Saudi Arabian Banks Lend More on Surge in Government Spending: Arab Credit

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

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 $130 billion 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 3-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, according to data compiled by Bloomberg.

Tapping Financing

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 6.5 percent this year, the International Monetary Fund said in August.

Ma’aden said on Oct. 16 its aluminum project with Alcoa Inc. obtained financing valued at 3.72 billion riyals ($992 million) from 13 local and international banks. A day earlier, Sahara Petrochemical said it signed a bridge loan agreement with Riyad Bank for no more than 1 billion riyals to finance projects.

A $2.85 billion Saudi Electricity power project being developed by Acwa Power International and South Korea’s Samsung C&T Corp. 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,” said Murad Ansari, an analyst at investment bank EFG-Hermes Holding SAE.

Loans and Advances

Saudi bank loans and advances to the private sector increased 9 percent from a year earlier in September to 798.4 billion riyals, the highest level this year, according to monthly data from the Saudi central bank.

Lending through the remainder of the year “will continue at a similar pace,” 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,” said Wael Chalak, senior equity analyst at Audi Saradar Investment Bank. “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.

Crown Prince Nayef

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.

That day the cost of insuring Saudi debt against default fell to 103 basis points, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The cost of Saudi debt reached this year’s high of 143 basis points on Feb. 21 amid Shiite-led protests in the eastern oil-producing region and in Bahrain.

Saudi Arabia’s credit default swaps closed at 113 basis points yesterday, CMA data show. The contracts for Qatar and Abu Dhabi stand at 111 basis points, according to the data.

King Abdullah’s cabinet announced in August 2010 a $384 billion 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.

Unlikely to Change

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

Saudi bank lending had slowed in the previous two years after two family-owned businesses defaulted on at least $15.7 billion 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 (RJHI) third-quarter net income climbed 18 percent to 1.94 billion riyals. Saudi British Bank (SABB), the lender 40 percent owned by HSBC Holdings Plc, 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.”

To contact the reporter on this story: Glen Carey in Dubai at gcarey8@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net

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