The Saudi Arabia Central Bank (SAMA) has raised banks' maximum allowable loan-to deposit (LTD) ratio to 90 percent from 85 percent. The increased LTD limit will allow banks to continue expanding credit while limiting price competition for deposits and their need to use expensive long-term borrowing (included in the LTD definition from SAMA), which supports banks' profit. The actual LTD ratio increased in December 2015 to 81 percent from 76 percent in 2014 (SAMA defines the LTD ratio as including both deposits and the very small amount of Saudi banks' long-term debt in the denominator). Saudi credit growth remained elevated at around eight percent in 2015 (but down from 12 percent in 2014). However, public-sector deposits placed with banks declined (primarily because of lower oil revenues) and drove an overall slowdown of net deposit inflows to around one percent, down from 12 percent in 2014. Deposits are Saudi banks' primary source of funding and accounted for 78 percent of total assets and 90 percent of non-equity funding as of December 2015. Funding via long-term borrowing has historically been very limited in Saudi Arabia (i.e., a maximum 2 percent of total funding in past five years) given the abundance of non-interest-bearing deposit flows. This year, Moody's expects banks' funding "to be constrained by muted deposit growth. Therefore, the solution for some banks to fund credit growth this year under an 85 percent LTD ratio constraint would have been to compete for fixed deposits on price and to raise long-term borrowing." Moody's further said SAMA's increase of the maximum allowable LTD ratio to 90 percent will therefore allow some banks to continue expanding their loan portfolio and top-line revenues. By reducing banks' need to raise more fixed deposits and long-term borrowing, it will also moderate the negative effect that tightening liquidity and rising interest rates are having on Saudi banks' cost of funding: three-month SAIBOR rose to 1.7 percent in February 2016, its highest in seven years. SAMA's action, which is intended to induce credit-fuelled economic growth, comes amid weakening fundamentals. "We expect prolonged low oil prices (i.e., Brent averaging $33 per barrel in 2016 and $38 in 2017) and lower government spending to negatively affect loan performance, increasing nonperforming loans to 2.5 percent this year from 1.4 percent as of September 2015. We expect the relaxed LTD ratio will further expose banks to funding volatility, which stems from high deposit concentrations. In this context, although we expect loan growth to moderate to around 5 percent in 2016, softer regulation on banks' funding will widen the gap between credit and deposit growth." The implementation of SAMA's conservative prudential framework has allowed Saudi banks to build very high funding and liquidity metrics in recent years. The Saudi banks' current 81 percent LTD ratio compares favorably with the 89 percent average for Gulf Cooperation Council (GCC) banks and 93 percent for global peers with an a3 baseline credit assessment (the average baseline credit assessment for Saudi banks is a3). Besides, Saudi banks have already implemented Basel III standards and "we estimate their December 2015 liquidity coverage ratio at 200 percent and net stable funding ratio at 130 percent – both very high levels. — SG
