• Reserves inch up in May on large loan; macro weakness persist Foreign reserves edged up only USD0.7bn in May despite the govt finalising a syndicated loan of USD10bn, still signalling elevated levels of reserve burn especially when considering higher oil prices. General govt deposits at SAMA rose by USD6.7bn, the largest increase since 2013, possibly reflecting the fresh inflow of funds. The government also continued to expand its local borrowing, issuing another USD3.6bn in bonds in May. Other financial system indicators (letters of credit, credit growth and monetary aggregates) still point to weak levels of underlying economic activity.
• Saudi banking – Liquidity challenges persist
Sector deposits declined 0.5% M-o-M; 1% YTD decline: Aggregate deposits in the sector declined 0.5% M-o-M, bringing the total decline to 1.0% YTD. Private sector deposits declined 1% M-o-M. Sector LDR rose 120bps to 89.9% as loan growth sustained despite the decline in deposits. The money supply base continues to contract, declining 0.4% M-o-M.
Loan growth momentum sustaining; but banks reaching capacity: Loan growth momentum was broadly steady at 9.5% Y-o-Y/0.8% M-o-M, mainly driven by short and medium-term loans. We believe corporate working capital requirements have risen due to the government’s slower payments. However, we believe that a lack of growth in the funding base is showing capacity constraints at banks. The sector LDR stood at 89.9% in May.
We continue to favour Samba in this tight liquidity environment: Samba’s low LDR makes it stand out in the current environment. While other banks are likely to face capacity constraints soon, Samba can use its balance sheet liquidity to grow profitably. Samba’s LDR of 74.2% in March 2016 was significantly lower compared to the sector average of 87.5%. The stock is the only Saudi bank on our MENA top 20 list.
• POS & ATM data shows mild recovery in May, first in 2016 The value of point-of-sale (POS) transactions increased 6% Y-o-Y in May 2016 (+20% M-o-M), while ATM cash withdrawals were flattish Y-o-Y (+1%, +10% M-o-M). Combined, the value of POS & ATM transactions was up 2% Y-o-Y (+12% M-o-M) for the month, after being on a downtrend since February due to subsidy reforms, limited wage growth, and a high comparable base. For April (figures were not released last month), POS transactions fell (-1% Y-o-Y, -4% M-o-M), as did ATM withdrawals (-1%, -7%). Also, February and March 2016 figures were revised downwards (combined value of POS & ATM transactions -6% and -1%, respectively). On a YTD basis, the combined value inched down -3% Y-o-Y.

Mohamed Abu Basha
Murad Ansari
Nada Amin