Saudi lenders loosen up

06 July 2010

Risk appetite returns as banks look to book new deals after dismal 2009

Back in 2009, corporates across the region complained banks were virtually closed for business. For most of the Gulf, getting loans remains tough as lenders remain cautious. In Saudi Arabia, the tide is starting to turn.

Several huge project finance deals totalling about $30bn are set to close this year. In addition, several other corporate deals are in the works that will mean that lending activity could grow about 10 per cent. Not bad after total loans shrank in 2009.

The drive to start lending again is the result of several factors. As borrowers paid off debts in 2009 because of concerns about the economic outlook, Saudi banks found themselves sitting on more and more cash. Too risk averse to lend it, they largely put it back with the central bank at thin returns.

After a disappointing 2009, banks have to start booking new deals if they want to boost their profits in 2010. Interest rates are at historic lows as a result of the financial crisis, causing banks to chase a high volume of poorly remunerating deals to improve overall returns.

Saudi lenders need to start sending more money out of the door to make profits. This should benefit the recovery of the economy.

The danger is that the competition to lend drives interest rates down further, and leads to some hasty decisions. Most of the borrowers so far have strong state links, which has assured banks of their credit quality. As the market opens further, less credit-worthy borrowers will start trying to access the banks.

Risk management is also playing a less prominent role in 2010. After a crisis, especially one as severe as the past two years, it is inevitable the resulting caution would go too far. Stopping the pendulum from swinging back too far the other way in the name of business development will be a tough challenge.

Bankers are always criticised for their short memories. But with the economic recovery on shaky ground, it is too early to start lending with abandon.

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