The loan to deposit ratio of the Saudi banks has dropped in September as lending growth slowed for the second consecutive month.

Saudi Arabia loan-to-deposit ratio

Private sector credit growth fell to 14.3 per cent in September compared to a year earlier, while overall bank lending also rose by 14.3 per cent. Lending growth has been slowly falling since hitting a peak in May of 16.5 per cent.

The slowdown in credit growth has helped the loan-to-deposit ratio fall to 78.1 per cent, after hitting 78.8 per cent in August, the highest level since November 2012.

Bankers in the kingdom say that deal flow is slowing down as the year comes to an end and lenders are keen to digest the rapid expansion in their asset books that has been under way since 2011.

“We are definitely going through a slower period now, as the past two years have been exceptionally busy and competition among banks has been intense,” says one banker in Riyadh. “It looks like things will slow down for a little while now, as the next wave of deals is now being worked on for 2014 and beyond.”

Abundant liquidity in the local banks has forced down lending margins over the past two years, but that trend may now be coming to an end. After aggressively pushing banks to book new deals, the management of several lenders are now becoming much more sensitive to how loans are being priced.

“Eighteen months ago, the emphasis was to go out and book assets,” says another lender at a local bank. “Now there is more attention being paid to loan pricing, and that can only be a good thing.”

NCB Capital, the investment banking arm of the local National Commercial Bank, said in a recent research note that net interest margins at Banque Saudi Fransi had risen 7 basis points in the third quarter of 2013 compared to the second quarter. It also said that margins at Sabb, the local affiliate of the UK’s HSBC, widened in the third quarter, suggesting that lenders were making progress in reversing declines in their margins.

Deposit growth has also started to slow in Saudi Arabia over the past two months, with deposits rising 14.1 per cent in September compared with 16.7 per cent in May.

Activity among retail customers picked up in September, with ATM withdrawals and point of sales transactions both rising. In August, consumer activity appeared to slow as the traditionally quiet summer impacted retail spending. ATM withdrawals hit the highest level in several years in July, SR62bn, although they fell to SR47bn the following month. In September, cash withdrawals rose again to SR51.8bn.