Saudi banks’ deposits shrink as government pulls back funds

Deposits at Saudi Arabian banks have shrunk as the government withdraws emergency funds injected when oil prices slumped, although weak loan demand makes a liquidity crunch unlikely.

Eight of the top 12 Saudi banks reported lower deposits in their second-quarter earnings, released over the past couple of weeks.

Deposits at Alawaal Bank tumbled 19 per cent from a year ago to SAR66.2bn ($18bn), the bank said on Monday. Deposits at Bank Aljazira fell 3 per cent to SAR47.8bn.

Bucking the trend was the country’s biggest lender, National Commercial Bank, with a 1 per cent rise in deposits to SAR317.7bn, while major Islamic bank Alinma saw a 4 per cent increase.

In 2016, the government placed deposits in the banking system to counter a shortage of funds due to low oil prices, which was pushing funding costs up sharply. Oil prices have now partially recovered, however, and the central bank wants to avoid capital outflows by having Saudi interest rates rise in line with U.S. rates.

As a result, monetary authorities said early this year they would let the emergency deposits expire, pulling some money out of the system to prevent the money market from being too loose.

Deposits by government entities in all commercial banks shrank 11.7 per cent from a year earlier to SAR313.6bn in June, central bank data released on Sunday showed, with time and savings deposits accounting for all of the drop.

Deposits by the private sector rose sharply, however, so that total deposits in commercial banks fell only 1.2 per cent to SAR1.61 trillion.

Normally, shrinking deposits would pose the risk of another funding shortage in the banking sector, but Saudi Arabia’s sluggish economic growth is keeping down demand for money. Bank lending to the private sector edged up just 0.6 per cent from a year earlier in June.

Commercial banks’ loan-to-deposit ratio fell to 78.1 per cent in June, the central bank data showed. This was far below the regulatory maximum of 90 per cent, suggesting banks have plenty of room to expand lending if demand for loans revives.

The central bank changed the formula for calculating the loan-to-deposit ratio in April by giving long-term deposits higher weights in order to encourage banks to introduce savings products.