The Saudi Arabian Monetary Agency (SAMA) released monetary data for January 2016. Major highlights are: 1)aggregate sector profits rose to SAR3.7bn (+11.9% M-o-M, but -3.7% Y-o-Y); 2) deposit base continued to shrink – 0.5% lower M-o-M; 3) sector loans growth improved to 9.1% Y-o-Y; 4) sector loans-to-deposits rose to 86%; and 5) Samba better placed due to low LDR compared to peers   Sector profits recover: Aggregate profits of the banking sector rose by 12% M-o-M to SAR3.7 billion, recovering from the sharp decline in December. This is likely to have been helped by lower provisioning pressures in January, in our view. However, profits were 3.7% lower Y-o-Y. Though demand deposits base expanded (0.9% M-o-M) after a sharp drop in December, total sector deposits declined by 0.5% M-o-M as banks shed time deposits (-3.4% M-o-M). Since June 2015, sector demand deposits have declined by 9% compared to a 3% decline in total deposits during the same period. Demand deposit mix improved marginally to 61.7% in January, but remained well below 2015 average of 64.5%.   Loan growth accelerates to 9.1% Y-o-Y; sector LDR rises to 86.1%: Sector loan growth momentum continued to improve, with sector loans rising by 9.1% in Jan-16 compared to 8.9% in Dec-15. However, with deposit base declining M-o-M, sector loans-to-deposit ratio (LDR) edged up to 86.1% in January from 84.8% in December. Bulk of the incremental lending in January was short and medium term, and is likely to be driven by working capital requirements of the corporates in wake of slow-down of payments from the government. Loan growth pickup in 4Q2015 was mainly driven by Commerce and Building and Construction, which accounted for 71% of incremental lending in 4Q2015. We believe that this trend is likely to have continued into January. While loan growth is strong at the start of year, we expect loan growth to slow-down once the gap on corporate working capital finance due to weaker government spending is plugged.   Other macro drivers weak on a M-o-M basis: ATM withdrawals, POS transactions and letter of credit (LCs) data remained weak on a M-o-M basis. New LCs opened declined 10% M-o-M, while POS and ATM transactions were broadly flat M-o-M.   Samba relatively better placed; remains our top pick in Saudi banks universe: Samba and BSF remain our top picks in the sector. However, given the ongoing liquidity squeeze in the sector, we view Samba as relatively better placed compared to peers due to its balance sheet liquidity. Samba’s LDR stood at 75.7% in Dec-15 compared to sector average of 84.8%, while the bank has seen only marginal deterioration in its demand deposit mix (64.6% in 4Q15 compared to 66.6% in 3Q2015). (Murad Ansari, SAMA)