The aggregate loan-to-deposit ratio of banks in Saudi Arabia has hit its highest level since 2008 as loan growth continues to outpace deposit growth.

The ratio hit 78.8 per cent at the end of August, still below the regulatory guideline of 85 per cent, but a sign that rapid credit growth may soon have to slow. Loan growth in the year to August was 14.8 per cent, the slowest pace for a year. Deposit growth was 14.8 per cent in the same period.

Saudi loan-to-deposit ratio

The local NCB Capital said in a research note, “With loan growth higher than deposit growth, we may see short-term pressures on cost of funding which may impact fourth quarter net profits.” Credit growth hit its highest level since the onset of the financial crisis in May.

Aggressive asset booking by Saudi banks has put pressure on interest margins over the past two years. That trend may now finally be coming to an end. NCB Capital said third quarter results of the banks indicated that net interest margins were flat or marginally higher. It added, “This bodes well for the sector as we are seeing the bottom of net interest margin contraction.”

Increasingly banks in Saudi Arabia are trying to avoid bidding down lending rates in order to book assets. “We have actively made a decision to walk away from deals where the pricing is too low,” says the head of one local bank.

The intense competition to book new deals has been a cause for concern at local banks who worry that it forces them to book more deals at a lower margin in order to try and grow their profitability. Another banker in the kingdom says, “Over the past year or so banks have been able to grow assets, but it has come at a price, now we are seeing the focus shifting to trying to protect margins.”

Asset growth was 11.7 per cent in the year to August. Saudi banks have been booking double digit asset growth for much of the past year.

Banks in the kingdom have broadly reported strong profit growth in the third quarter as a result of falling provisions.

The latest figures from the Saudi Arabian Monetary Agency (Sama) also reveal that assets held by the central bank have eclipsed $700bn for the first time. That gives the kingdom enough savings to entirely fund almost three years of government spending.

Activity at ATMs and point-of-sale transactions dropped significantly in August as the country went through the traditionally quiet summer period. The value of ATM withdrawals fell from SR62bn in July to SR48bn in August. It was the lowest that ATM withdrawals have been February 2012.