Saudi Arabian bank deposits fell the most in nine months in May.
Total deposits at the 23 lenders operating in the largest Arab economy fell for a second month, dropping 0.5 percent in May, the most since last August, to SR1.14 trillion ($ 304 billion), the latest central bank data showed.

Borrowing costs in the Kingdom have risen at the fastest pace in the Gulf Cooperation Council this year as lending picks up amid state plans to spend more than $ 500 billion building infrastructure and industry, and creating jobs.

The three-month Saudi interbank offered rate, which has some influence on how banks set deposit rates, has risen 20 percent this year to 0.9375 percent today, near its highest since April 2009. That compares with a 1.6 percent drop in the equivalent UAE rate, 5.7 percent advance in Qatar, 6 percent increase in Bahrain and a 12 percent drop in Kuwait, the data noted.

The Saudi rate’s spread over the three-month London Interbank Offered Rate has more than doubled this year to 48 basis points, according to data compiled by Bloomberg.

The yield on Saudi Arabia’s one-year treasury bills gained seven basis points this year to 0.58126 percent at a sale yesterday. The six- month bill yield is up 4 basis points over the same period to 0.44449 percent.

Saudi bank deposits fell by SR7.4 billion in May from March levels, data of the Saudi Arabian Monetary Agency show.

Demand deposits, which pay no interest, rose by SR7.5 billion, while interest-bearing fixed deposits declined by SR10.2 billion, according to the data. Foreign currency deposits also decreased by SR1.9 billion.

The shift has taken place as banks’ margins get squeezed. The net interest margin at Saudi British Bank, which is 40 percent owned by HSBC Holdings, narrowed to 2.65 percent in the first three months of this year from 2.76 percent in the fourth quarter, data compiled by Bloomberg show. Samba Financial Group’s net interest margin fell to 2.85 percent last year from 3.12 percent in 2010.

Net interest margins at Al Rajhi Bank, the biggest Saudi lender by market value, fell to 4.8 percent in the first quarter from 5.1 percent in the last quarter of 2011, Bloomberg noted in its compiled data.

"Banks have shed some of the expensive time deposits to manage their funding costs," Murad Ansari, Riyadh-based analyst at investment bank EFG-Hermes Holding, said earlier. "Banks manage their funding cost and their liquidity based on how the deposit liquidity is shaping up."

"Banks would like to focus on maintaining margins as we are seeing a lot of margin contraction," Mahmood Akbar, a Riyadh-based analyst at NCB Capital Co., said. "Although the deposits are virtually non-interest bearing, every little bit helps, particularly for maintaining or holding back margin compression."

Demand deposits comprise 60 percent of the total, while savings deposits make up 26 percent, central bank data showed.

Saudi companies borrowed $ 8.7 billion so far this year in syndicated loans, more than doubled the amount they borrowed in the year-earlier period, data compiled by Bloomberg show.

Loans to private businesses grew 13 percent in May, near the fastest pace in three years. –