Saudi banks’ borrowing costs are increasing at the fastest pace in the Gulf Cooperation Council as deposits trail credit growth, fuelling speculation more lenders may raise funds through bond sales.

The three-month Saudi Riyal Interbank Average Offered Rate, the measure known as Saibor that banks use to lend to each other, has climbed 21% this year, to 0.9425% on Monday, the highest since April 2009, data compiled by Bloomberg show. Bank deposits fell in May for a second month, while lending expanded 13%, central bank data show.

A $ 500bn government spending plan has helped banks in the world’s top oil exporter arrange the most loan syndications on record this year, data compiled by Bloomberg show. As banks look to finance infrastructure projects and meet rising demand for loans, some may sell bonds to raise funds, according to London-based Religare Noah and Dubai-based Emirates NBD.

“Liquidity is tightening in Saudi Arabia because credit is growing while deposits are shrinking,” said Nick Stadtmiller, head of fixed-income research at Emirates NBD, the biggest bank in the United Arab Emirates by assets. “The banks will probably continue lending to keep up with the government’s spending projects, but they will have to pay for the funds, hence Saibor ticks up.”

Authorities in the biggest Arab economy rely on weekly sales of treasury bills as a bank liquidity management tool. Auctions take place on Mondays and the Saudi Arabian Monetary Agency, the kingdom’s central bank, discloses amounts issued on a monthly basis. The central bank sold about 7bn riyals ($ 1.9bn) of securities in May, bringing total outstanding notes to about 129bn riyals, little changed from the end of 2011, according to its most recent data.

The spread between Saibor and US dollar rates has widened to 48 basis points, or 0.48 percentage point, this year, the highest since March 2010, according to data compiled by Bloomberg. The three-month interbank rate in the UAE, the second-biggest Arab economy, has fallen four basis points this year to 1.47625%. Qatar’s interbank rate has gained seven basis points to 1.23571%.

The greenback’s gain in the forwards market “shows that liquidity is not as ample as it was a few months back,” Stadtmiller said by e-mail on July 5. Currency swaps are an agreement between two parties to exchange future payments in one currency for payments in another currency.

Saudi banks have arranged at least $ 5.5bn in syndicated loans this year, the most since Bloomberg began tracking the data in 1999. More loans are in the pipeline.

Saudi Arabian Oil Co and Dow Chemical Co sent requests to banks for $ 12.4bn in financing for Sadara Chemical Co, their $ 20bn joint venture, two bankers with knowledge of the situation said May 30. The financing include $ 2.66bn in bank loans and $ 1.4bn from the sale of Islamic bonds, the people said, asking not to be identified because the information is private. Banks have until July 23 to express interest.

“Banks are being re-invited to participate in mega projects as well as consumer lending,” Emad Mostaque, a London-based strategist at Religare Noah, said in a phone interview on July 5. “The central bank was a bit worried about name-lending, how deep did it go, but now they are feeling more secure about that.”

Two Saudi family companies defaulted on at least $ 15.7bn of loans in 2009. The shock prompted Saudi banks to take provisions for non-performing debt and apply greater caution on credit applications.

Cumulative profits for the banks have risen every month this year, reaching 15.4bn riyals in May, central bank data show. The banking industry’s loan growth may reach between 13% and 16% in 2012, David Dew, managing director of Saudi British Bank, the Riyadh-based lender 40% owned by HSBC Holdings, said in an interview in June at the World Economic Forum in Istanbul.

Saudi British is the only bank that raised money through local-currency bond sales this year, selling of 1.5bn riyals in March, data compiled by Bloomberg show. Banque Saudi Fransi, partly owned by Credit Agricole, sold $ 750mn in dollar-denominated sukuk in May.

Saving deposits dropped 3% in the three months to May to 296.8bn riyals, while demand deposits by businesses and consumers was little changed at 644.4bn riyals, central bank data show. Brent crude prices tumbled 20% in the second quarter to $ 97.80 a barrel.

“Over the past two months, you’ve had a liquidity squeeze, with oil prices coming down,” Jean-Michel Saliba, London-based economist at Bank of America Merrill Lynch, said by phone on July 5. “That has translated into weak private-sector demand deposit formation.”

Still, even with the loan-to-deposit ratio rising at about 81%, it remains at 2005 levels, Saliba said. A return of oil prices over $ 100 a barrel “for a couple of months” would help “liquidity normalise again,” he said.

Loan-to-deposit levels compare with more than 120% in Qatar, the highest in the GCC.
The Saudi economy may expand 6% this year, the second-fastest rate in the Gulf Cooperation Council after Kuwait, according to International Monetary Fund forecasts.
Banks may also expand mortgage lending after the kingdom passed its first mortgage law this month, ending more than a decade of debate.

While economic growth and government spending may boost lending further, not all Saudi banks have sufficient capital to meet the demand for loans, said Mostaque. “So there will definitely be a push to raise extra capital especially if loan growth continues at the rate we have seen in the first half of the year, which I believe it will.”

Of 921.4bn riyals in loans, 539.5bn riyals are classified as short-term, central bank data show. Loans with maturities exceeding three years make up 24% of the total, the data show.

Bond sales may help “extend the duration of bank funding for the anticipated pick-up in mortgage lending,” Mostaque said.