Saudi Arabian Central Bank Governor Ahmed Abdulkarim Alkholifey said SAMA is planning to drain excess liquidity from the banking system to mitigate pressure on the peg as US interest rates rise, according to Bloomberg. SAMA is planning to withdraw some deposits placed with commercial banks in 2016. The move should boost the interbank rate that has lagged LIBOR.
 
SAIBOR and LIBOR rates crossed for the first time since 2009 in February. The negative spread between the two rates widened to as much as 19bps on 16 March; however, the spread has been tightening since then. The move to drain liquidity from the banks should help further correct SAIBOR’s negative spread to the LIBOR. Earlier in March, SAMA hiked its repo rate (the rate at which banks can borrow from the Central Bank) for the first time in several years to reduce the negative spread between SAIBOR and LIBOR. 
 
We expect Saudi interbank rates to follow the USD LIBOR as US rates rise, as SAMA follows US tightening monetary policy cycle. KSA banks’ balance sheet are positively geared to rising interest rates, and we see spread expansion as a key driver of 2018 earnings. Saudi Arabian banks have a relatively high proportion of their deposits in CASA. We highlight Rajhi (CASA of 92%), NCB (77%), SAMBA (64%) and SABB (68%) as the banks best positioned to benefit from rising rates.