• ‘Affordable mortgage’ scheme to lift LTV to 85% from 70% After a year of sluggish growth, mortgage demand should get a boost from an increase in loans-to-value ratio (LTV) for mortgages. The Saudi Arabian Monetary Agency (SAMA) said yesterday it would raise the LTV ratio on mortgages to 85% from 70% under the planned ‘affordable mortgage’ scheme in coordination with the ministries of housing and finance. It gave no details on when the programme would start or the eligibility criteria. Under the scheme, Saudi citizens would finance 15% of the property value upfront and commercial banks would finance the remaining 85%, with 15% of that 85% guaranteed by the Ministry of Finance. We expect all banks to benefit, but highlight Al Rajhi, Riyad, NCB and SABB as mortgage market leaders.
• 20% mortgage growth could add 100bps to sector growth… Mortgage growth slowed sharply in 2015 to 8.5% 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 7.5% of total sector loans as of Dec 2015. Revival of mortgage demand could be a glimmer of opportunity 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 overall sector credit growth forecast of 5%.
• …But will attract competition; conventional banks to be aggressive Given rising pressure on disposable income by the removal of subsidies and potential introduction of indirect taxes, we believe that historical mortgage growth rates are unlikely to be repeated. However, subdued lending opportunities elsewhere could push banks to compete aggressively in the mortgage market. The general perception is that Islamic banks are key beneficiaries, but we note that conventional banks were the biggest market share gainers in the previous mortgage growth cycle.
• MENA strategy: LTV change is ‘non-fiscal’ boost; macro still a concern Yesterday’s SAMA announcement and the pending implementation of the white land tax are clear signs that the KSA is trying to address the shortage of affordable housing. Apart from the boost to banks, we believe that such measures will be positive for cement producers and real estate developers in the medium term. However, the move is not sufficient for us to change our UW stance on KSA equities. We await the details of the government’s medium-term economic reform plan, including any potential second waves of subsidy reforms, and we believe that the market is being too complacent about the impact of fiscal consolidation on consumer behaviour and other key sectors of the economy. In the meantime, the impact of the white land tax on housing market dynamics is unclear, and we look for more details on the eligibility for the 85% LTV scheme.

Murad Ansari
Simon Kitchen
Mohamed Al Hajj