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Moody’s says Saudi accounts freeze bad for banks

|By Arabian Post Staff|Saudi Arabia’s freezing of bank accounts is credit negative for banks, Moody’s said in a review.
On 8 November, the Saudi Arabian Monetary Authority (SAMA) froze a large number of bank accounts belonging to princes, ministers and businessmen who were arrested as part of an investigation by a new anti-corruption committee that began on 4 November.
The rating agency said these actions are credit negative for Saudi banks, given their significant reliance on such deposits.
“ In the current context of slowing economic activity (we expect Saudi Arabia’s real GDP to contract 1% in 2017) and a 2% year-on-year decline in net loans as of September 2017, a prolonged freezing of funds in the system could further limit credit recovery in the country. We expect real GDP growth to pick up to 1.1% in 2018 and banks’ lending to increase around 5% in 2018.” It said.
A negative effect on business confidence associated with a prolonged and evolving freezing of banks’ accounts risks increasing cash transfers outside the Saudi banking system or the liquidation of investments in the Gulf Cooperation Council region because other regional banking regulators also have requested that banks provide information on accounts linked to Saudi arrested individuals.
Moody’s said that Saudi banks’ access to funding improved this year amid muted credit growth, but private-sector deposits declined by 3.2% year to date through September 2017. Considering that Saudi banks’ deposits are concentrated (top 20 depositors account for around one-third of total customer deposits), any significant freeze of such deposits or cash outflows would further dent banks’ deposit funding. It said.
A prolonged freeze also poses asset quality risks because large depositors are often large borrowers and business owners. SAMA confirmed that it has not requested that banks freeze any corporate accounts, thereby limiting the effects of its action on the economy through payment defaults to employees, suppliers and banks.
However, Saudi Arabia’s corporate sector remains dominated by unlisted family owned businesses with uneven governance and disclosures and frequent intermingling of individual and corporate activities, which ultimately could expose corporates to these individuals’ frozen accounts. Saudi banks’ funding is only marginally sensitive to changes in confidence from international lenders or depositors, with foreign liabilities constituting 3.8% of total liabilities as of September 2017.
Additionally, Saudi banks have a low reliance on confidence- and price-sensitive market funding, which equalled 6% of total assets as of June 2017. As a result, the three-month Saudi Interbank Offer Rate has remained broadly stable at 1.8% since the beginning of the investigation, indicating no immediate liquidity pressure.
Moody’s said it expects that SAMA’s hands-on regulatory approach will guarantee close monitoring of banks’ funding base variations, and the implementation of preventive measures if needed. During challenging liquidity conditions in 2016, SAMA successfully launched a number of monetary policy measures aimed at relaxing funding cost pressures for banks and facilitating access to credit.

Also published on Medium.