The liquidity strains in the domestic economy stem from the declining trend of the depositary base. Forming the base of banks’ balance sheets, total deposits in the Saudi financial system dropped by 3.1 percent to SR1.58 trillion by the end of July, the sixth consecutive annual decline which brings the YTD drop to SR26.3 billion. Banks utilize deposits to provide financing needs and Saudi Arabian Monetary Agency (SAMA) regulates the banking system leverage to mitigate risks domestically, according to a report by the National Commercial Bank. 
The drop in oil revenues has certainly acted as the main drag on bank deposits and coupled with the issuances of local debt, the banking system’s balance sheets are feeling the pressure of the slowing economic cycle. The majority of withdrawals in bank deposits were attributed to demand deposits, posting a 9.7 percent Y/Y decline in July. 
Meanwhile, time and savings deposits registered a gain of 14.2 percent annually, during the same month. While the government entities has been reducing its interest-bearing deposits over the past year, businesses and individuals’ time and savings deposits have recorded a double-digit increase for the past eleven months as banks compete to maintain their depositary base. 
Similarly albeit at a slower pace, total claims of the banking system, excluding T-bills and government bonds, decelerated for the fourth month by the end of July to an annual rise of 8.0 percent. Banks are exploiting momentum activity in the credit market but we believe growth will be difficult to maintain amid the current regulatory framework. 
Given the fact that the banking system has breached the 90 percent loans-to-deposits ratio limit, according to NCB sustaining growth would require easing the limit to 100 percent in line with regional counterparts. An injection of SR12 billion by the central bank in June to smaller banks indicates the willingness of decision makers to support local banks, yet the current challenges will need bolder moves in the coming months. 
By maturity, short term credit posted the slowest annual increase since October 2015 at 8.0 percent, albeit holding the largest share at 51.8 percent. Long-term credit has also witnessed a deceleration relative to previous years at 8.0 percent Y/Y. Meanwhile, medium- term credit has increased substantially more than its counterparts, supporting our previous notion of banks attempting to raise deposits by offering lucrative rate on time and savings products. 
As for the private sector, the NCB report said, credit lines extended to businesses and individuals have reached SR61.3 billion over the first seven months of 2016, a drop of 23.3 percent in comparison to the same period of 2015. On an annual basis, credit to the private sector grew by 7.7 percent. Meanwhile, claims on the public sector declined by 14.2 percent as treasury bills reached the lowest level since 2007 at SR44.0 billion to provide liquidity for government bond issuances, which registered a significant 217.8 percent annual rise to SR167.3 billion. While there is little room for local banks to generate liquidity for further debt issuances, the government’s decision to tap international markets will ease some of the pressures of the local market.

Source: Arab News