• Reserves resume drop in June; weak macro conditions sustain Foreign reserves were depleted by USD11.2bn to USD570bn in June, with reserve burn resuming after a slight increase in May – reserves are down USD46bn in 2016 YTD. SAMA data show a continuing fall in net government claims on the banking system – in June, the M-o-M change in such claims was close to that in the change in net foreign assets. The depletion of foreign assets continued to pressure domestic liquidity, with all monetary aggregates showing annual contractions in June. Other financial system indicators (letters of credit and credit growth) still point to weak levels of underlying economic activity, though the Y-o-Y change in new LCs appears to be bottoming out.
• Saudi banking – Tightening liquidity to weigh on loan growth
Sector deposit inch up, but mix deteriorates: Aggregate deposits in the sector rose 0.1% M-o-M, recovering from a decline in the previous month. Private sector deposits rose 1.8% M-o-M, mitigating a 3.5% M-o-M decline in deposits of government entities; however, the deposit mix deteriorated - demand deposits mix fell to 60.6% in June compared to 62.1% in May.
Loan growth momentum easing; banks hitting revised regulatory ceiling: Loan growth momentum decelerated to 9.1% Y-o-Y/0.7% M-o-M, and was driven mainly by short and medium-term loans. During 2Q16, manufacturing and financial institutions have been the biggest recipient of credit, followed by building and construction segment. Lack of deposit growth is leading to capacity constraints at banks, with four of the banks hitting regulatory LDR ceiling of 90% at end of June.
We continue to favour Samba in this tight liquidity environment: Samba’s low LDR makes it stand out in current environment. While other banks should face capacity constraints soon, Samba can use its balance sheet liquidity to grow profitably. Samba’s regulatory LDR of 76.0% in June 2016 was significantly lower compared to the sector average of 84.3%. The stock is the only Saudi bank in our MENA top 20 list.
• POS & ATM data show further recovery likely on Ramadan timing The value of point-of-sale (POS) transactions increased 3% Y-o-Y in June 2016 (+3% M-o-M), while ATM cash withdrawals were up 11% Y-o-Y (+8% M-o-M). Combined, the value of POS & ATM transactions was up 9% Y-o-Y (+7% M-o-M) for the month, a decent improvement from last month’s 2% (was a downtrend over Feb.-Apr. 2016). We believe having more Ramadan (strongest month of the year for food sales) days this year vs. June 2015 has supported the month’s trends. For 2Q16, POS & ATM transactions value combined rose 3% Y-o-Y.

Mohamed Abu Basha
Murad Ansari
Nada Amin