Credit growth still rising although bankers complain of dearth of new deals

13 March 2013

Bank lending still growing but emphasis shifting to more profitable retail loans

Loan growth in Saudi Arabia rose by 16.2 per cent in January, continuing the rapid pace of expansion of recent months although bankers in the kingdom are complaining about a dearth of new deals in the year so far.

Bankers in the kingdom say the majority of work they have been doing in the year is trying to get large infrastructure financing packages closed, rather than on any new transactions.

The only notable new deal in the year launched this year to date has been a SR1.7bn ($453m) revolving credit facility for Acwa Power. Otherwise bankers are preoccupied with trying to close deals like the $20bn Sadara Chemical Company financing, which was launched almost a year ago.

“So far most of what we have been doing this year is trying to finish off deals that were launched last year and have taken far longer to close than expected,” says one source at a local lender. “There has been hardly any new transactions launched although there is a huge pipeline of deals.”

Most of the growth in new loans is thought to being directed toward more profitable retail lending. Net interest margins at most Saudi banks have been falling as a result of increased competition among lenders to book new assets. “It has been a great period to be a borrower in Saudi Arabia,” says another banker in the kingdom. “Banks are falling over themselves to lend and pricing has really fallen.”

With the market now pausing to digest and complete the deals that were agreed last year, there is some debate about how eager banks will be to get back into a competition to lend that many think has already pushed pricing too low.

A fresh wave of mega-projects could start approaching banks for funding later this year. Among these is the $3.4bn elastomers project being developed by Saudi Basic Industries Corporation (Sabic) and the US’ ExxonMobil, known as Kemya. Saudi Arabian Mining Company (Maaden) had been expected to start approaching banks to fund its $7.5bn new phosphates project in April, but bankers say it is more likely to launch the deal later in the year now.

“When the next wave of deals start to come out I think there could be some attempts by the banks to start moving pricing up a little bit, but it will be difficult as a lot of these entities are government-owned,” says the second banker.

State-owned companies like Saudi Aramco, which is one of the partners behind the Sadara scheme, often borrow at reduced rates because of the low credit risk associated with them. They also tend to borrow large amounts, which puts pressure on banks if they are using large parts of their resources on relatively unprofitable loans.

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