Buffeted by an “unparalleled infrastructure, flexibility in production volumes and policy machinery”, all of which make it per Barclaysthe key player at the margin of the oil market” Saudi Arabia remains relatively insulated contra developed market-derived contagion–more so than any other GCC economy.  Increasing non-hydrocarbon imports, for instance, are a proxy for improving and resilient domestic demand driven chiefly by expanding private sector credit (9.8% y/y in October, compared with 8.7% in September) within a domestic banking system comparatively unconstrained by the high loan-to-deposit ratios (inversely correlated with liquidity) observed in UAE, Qatar and Oman, or the significant reliance on funding from European banks (and hence external funding base exposure to that sector’s ongoing deleveraging) seen in the UAE and Qatar (on the contrary funding remains largely based on customer deposits in Saudi Arabia at ~70% of total assets in 2011h1 versus 57.9 GCC avg).  To that end we remain intrigued (see our original thesis from last March) by the Saudi banking sector heading in 2012, home to nearly one-third of Global Finance’s recent “Safest Emerging Markets Banks” Top 20 rankings.  This doesn’t necessarily come as a surprise given capital adequacy (CAR) and non-performing loan (NPL) dynamics matched only by Qatar in terms of dual attractiveness while liquid asset ratios—i.e. cash, central bank certificates of deposit, interbank deposits and high-grade fixed income securities—are over 50% for certain Saudi banks (2x those seen by other GCC institutions).  And while one weakness of the sector in our view remains its credit/funding concentration (i.e. a predominantly corporate profile), banks such as Banque Saudi Fransi are targeting a larger retail base and the lower cost deposits and higher interest margins which come with it.

Admittedly the conservative asset growth and high risk aversion within the Saudi banking sector is largely a function of environment; aside from timeless speculation surrounding succession the Kingdom’s macro viability, for instance, remains intrinsically wedded to its swing-production power within OPEC and the ensuing, relative size and stability of its energy receipts which tie neatly in with the comparative,  aforementioned liquidity of its banks’ funding base (the government remains a major and/or majority shareholder of banks such as Samba Financial Group).  Indeed recent oil production cuts (from a peak of 9.9mb/d in August) during oil’s near-convergence earlier this year to the estimated fiscal breakeven oil price are symptomatic of an increasingly pragmatic state that, against an Arab Spring/Euro Malaise backdrop remains keen on fiscal expansion (25% y/y in 2011 and, despite official rhetoric of easing next year most analysts still envision spending momentum to continue with the overall effect being the state’s budget surplus will remain static if not increase slightly in 2012) and thus as ardent as ever in supporting a defacto price floor in crude (though citing non-OECD demand trends in particular, many energy analysts argue a reprise of oil’s post-Lehman price crash would be quite remote anyway) which should help translate into ‘backwardated’ markets for the appreciable future and thus even larger coffers for the Kingdom to tap.

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