• LTV on mortgages likely to be revised up to 85% After a year of sluggish growth, mortgage demand could be significantly revived if the loans-to-value ratio on mortgages is raised. News stories in local papers indicate that the Saudi Arabian Monetary Agency (SAMA) is considering raising the loans-to-value ratio on mortgages to 85% from 70%. Mortgage growth slowed sharply in 2015 after SAMA cut the LTV to 70% in November 2014. The aggregate mortgage book for banks grew at a CAGR (2011-14) of 37% and accounted for 6.5% of total loans in the sector as of June 2015. However, given rising pressure on disposable income by the removal of subsidies and rising input costs, we believe that historical mortgage growth rates are unlikely to be repeated.
• 20% mortgage growth could add 100bps to sector growth Revival of mortgage demand could be a glimmer in an otherwise dull year for credit growth in 2016, in our view. We estimate a recovery of mortgage credit growth to 20% in 2016 (from our forecast of 8%) could add 100bps to our estimate of overall sector credit growth of 5%. There are also proposals to link the disbursement of loans by the Real Estate Development Fund with mortgages. Effectively, the REDF loan (which is a soft loan from the government) could then serve as the down-payment, while the rest could be financed through a mortgage from the banks.
• But likely to attract competition; conventional banks to be aggressive Subdued lending opportunities elsewhere could push banks to compete aggressively in the mortgage market. While the general perception is that Islamic banks are the key beneficiaries, we highlight that conventional banks have been the biggest market share gainers in the previous mortgage growth cycle. We expect all banks to benefit, but highlight Al Rajhi, Riyad, NCB and SABB as the market leaders in mortgages.

Murad Ansari