Saudi banks' force of lending is largely driven by the level of deposits they accumulate. Following rigorous rules and regulations set by SAMA (Saudi Arabian Monetary Agency), deposits are the main component in deriving the level of financing the bank can write on their balances.

Local banks have amassed large levels of deposits over the past couple of years and have been rather stringent in lending. This has pressured the loans-to-deposits ratio to as low as 74.8 percent during April last year. However, toward the end of 2011, Saudi banks have started to utilize the liquid situation and expand their loans portfolios.

The pace of growing deposits has decelerated during the first half of 2012, recording a gain of 10.1 percent during June against the same month last year. Following May's relatively modest 7.6 percent Y/Y growth, June's rise was attributed to the sudden surge of other quasi-monetary deposits which are largely composed of foreign currency deposits, the latter expanding in June by 12.1 percent on an annual basis, according to a report by the National Commercial Bank (NCB).

The combined loans portfolio for local banks reached an all-time high during June at SR936.7 billion, a 15.1 percent gain over June 2011. During the first half of 2012, banks have increased their balance sheets by SR80.1 billion in fresh lending, almost the same amount for the whole of 2011 which stood at SR81.3 billion.

However, the maturities of the newly added assets differ from last years'. The focus has shifted to medium and short-term credit as oppose to long-term credit. The share of medium term credit has gained to a record 17.8 percent as banks have been drawn to finance SMEs on larger scale to diversify their portfolios. As a result of the pickup in lending activity, the L/D ratio has been supported to reach 80.7 percent for June.

As for the private sector, total claims expanded by 13.9 percent on an annual basis during June. Furthermore, credit to the building and construction posted the highest growth across all economic activities increasing by 49.4 percent Y/Y to reach SR73.4 billion. This hardly comes as a surprise as NCB's Construction Index reached 309.12 by the end of the second quarter of 2012. The building and construction sector will remain one of the strongest for the next few years as demand is far ahead of current supply levels. Additionally, the services sector posted the second highest growth at 47.1 percent Y/Y, followed by the utilities and health service at 45.6 percent Y/Y.

Meanwhile, total claims on the public sector contracted by 8.7 percent Y/Y as the level of treasury bills dropped drastically, which followed the elevated issuances last year in an attempt from SAMA to mop up excess liquidity in the market.

As the US Fed is expected to keep the interest rate at near zero till 2014, Saudi Arabia is likely to echo the decision by maintaining the current policy rate. Currently, inflationary pressures are subdued and price hikes can be handled by nonconventional methods such as adjusting the required reserve requirement, a decision opted by SAMA in 2008.

The Saudi interbank overnight rate (SAIBOR) gained marginally but remains under 100bps which creates a very accommodative environment for banks to easily manage cash levels in order to expand their balance sheet items and support local business and the economy as a whole, the NCB report said.

According to the Central Department of Statistics and Information (CDSI), overall Saudi exports increased by SR50 million Y/Y during May after they registered SAR14.8 billion.

This shows resilience despite the ubiquitous growing pains predominating international trade. In export categories, petrochemicals, with SR5.5 billion in value terms represent a sizable 37.2 percent of all nonoil exports. Save a retraction of 3 percent month on, it marked the highest surge of all exports over the course of the past 12 months of 14.8 percent.

Plastics ranked second amounting to 29.9 percent of exports. Notably, food stuffs was the only category that displayed a monthly upward trend with 7.1 percent M/M, in addition to a 6.2 percent increase year on. Base metals showed the biggest yearly decline of 11.2 percent with a monthly downturn of 13 percent, the NCB report said.