What’s new? Bloomberg reported that the Saudi Arabian Monetary Agency (SAMA) is likely to allow a relaxation on the loans-to-deposit ratios (LDR) ceiling from the current prescribed guidance level of 85% and raise the ceiling to 90%.   Background: The domestic system loans-to-deposit ratio stood at 84.8% at end of December 2015 as per SAMA’s Monthly Bulletin. However, this LDR calculation does not incorporate the long-term loans raised by the banks (EMTN, Sukuks, etc.), which are permitted to be included in the LDR calculation at the bank level. We estimate that system LDR, adjusted for the long-term loans, was at c81-82% at end of December 2015.   What’s the impact? If the relaxation on LDR does come through, it reaffirms the view of heightened liquidity pressures at the banks. We see two sources of impact:   It would allow banks to manage their liquidity, and possibly soften the pressure on deposit rates Create some headroom for loan growth, as the central bank would not like to see lack of credit availability stifle economic growth   While the current LDR ceiling is pushing banks to raise deposits aggressively, driving up the deposits rates, it is also limiting the bank’s ability to lend. We believe the relaxation in LDR would allow some breathing space to the banks to manage their liquidity, which should soften the pressure on deposit rates. A higher LDR ceiling should also create some headroom for loan growth at the banks. The central bank would like to see steady flow of credit in the system, in our view. Lack of credit availability could stifle growth in the economy, which the central bank would like to avoid, in our view. (Bloomberg, Murad Ansari)