How Sukuks are proving a viable financing option for Saudi Arabia

Following a record setting year, the sukuk market is becoming a viable alternative financing vehicle for local businesses, the National Commercial Bank  (NCB) said in its “Saudi Economic Perspectives 2014-2015” report released recently.

The report noted that global sukuk issuances dropped during 2013 to $118.2 billion, falling 15.1 percent mainly due to Malaysia’s weaker performance. The Asian market continues to hold the top spot for Islamic financing with a total number of 637 issues last year worth $80.9 billion. 

Saudi Arabia firmly came in second with a record setting $15.2 billion worth of sukuk, up 36.4 percent Y/Y, through 20 issues. The sukuk issuances of GACA’s Guaranteed Senior Sukuk II ($4 billion) and Aramco’s Sadara Sukuk ($2 billion) were the largest during 2013 on a global scale, cementing Saudi status in this rapidly growing market. 
Furthermore, SEC issued a two-tranche Islamic bond with a tenor of 10 years and a first ever 30 years sukuk, each with a value of SR3.75 billion. 

Evidently, the extended maturity will provide a pricing benchmark for longer-tenor sukuk and energize an alternative venue for financing infrastructure projects. 

Moreover, NCB report said the majority of issuances were denominated in Saudi riyals with varying return rates from a flat 1.5 percent for Islamic Development Bank’s issuance to a fluctuating 6 months SAIBOR plus 155bps for Saudi Hollandi’s Tier 2 sukuk. In addition, a number of banks opted for the Shariah-compliant alternative to boost their tier 2 capital, such as Saudi British Bank, National Commercial Bank, and the upcoming Banque Saudi Fransi issuance (SR2 billion).  The sustainable pace of monetary aggregates reduces the risk of overheating the economy. 

During 2013, the monetary base (M0) recorded its first annual contraction since 2008. The narrowest monetary measure settled at SR343.5 billion by the end of December, slightly lower than 2012’s SR350.6 billion. The decline is not representative of a negative situation as the largest component of M0, deposits with SAMA, decreased given local banks’ preference to utilize their excess reserves for granting credit. Accordingly, the credit market witnessed another healthy year by expanding at 12.1 percent Y/Y. Additionally, money supply (M3) maintained its double-digit growth, recording 10.9 percent on an annual basis. The local financial system remains liquid with excess reserves settling at 54.2 percent last year. Saudi banks held SR1.4 trillion worth of total deposits by the end of last year that represent more than 70 percent of their total liabilities and continue to provide a stable funding base. The capacity utilization, represented by the loans-to-deposits ratio, dropped to 79.9 percent by the end of last year after peaking in August at 83.1 percent. 

Interestingly, local banks continued to accumulate net foreign assets that grew by 9.6 percent to reach SR149.3 billion in 1Q2014 after a marginal 2.1 percent increase during 2013. 

As for the interbank market, NCB forecast that SAIBOR will remain around the 100bps level in the short-term due to the healthy cash levels of most Saudi banks.  

The Saudi banking system capitalized on reforms implemented during the financial crisis and posted record profits in 2013. The vibrancy of the private sector underpinned economic activities, which, in turn, provided opportunities for banks to expand their balance sheets, a scenario that is likely to materialize this year as well. 

Even though low interest rates kept net interest margins contained, the 12 locally incorporated banks by the end of last year recorded a staggering SR37.6 billion, an annual growth of 7.1 percent, supported by volume-growth in credit.