An in-depth look into Saudi bank liquidity metrics

Liquidity in the banking sector is deemed a fundamental pillar of a stable financial system in any country, especially after the 2008 global financial crisis which forced an overhaul of the global financial regulatory architecture.

Following the 2008 financial crisis, quantitative liquidity risk regulation became a cornerstone for global regulatory bodies, most notably efforts made by the Basel Committee on Banking Supervision (BCBS) and central banks.

Bank liquidity reflects the financial institution's ability to meet its cash and collateral obligations without incurring significant losses.

Among the key challenges is to optimize the liquidity cushion: enough to meet customer needs and address unforeseen circumstances, but still not in excess that it hampers profitability.

Given the ever-evolving global economic and regulatory environment, the ability to adapt and proactively manage liquidity will remain critical to the success of financial institutions.

The Saudi Central Bank (SAMA) is responsible for the prudential regulation and supervision of locally-operating banks’ liquidity levels pursuant to specific standards and measures that align with the global Basel III requirements. The most important of which are Liquidity Coverage Ratio (LCR), high-quality liquid assets (HQLAs), Loan-to-Deposit Ratio (LDR) and Net Stable Funding Ratio (NSFR).

LCR measures a bank's ability to meet its cash obligations during a 30-day stress scenario by holding HQLAs. SAMA requires this ratio to be at least 100%.

HQLAs are assets that can be easily and quickly converted into cash without significant loss in value, including cash and government securities. They are a key component in calculating the LCR.

LDR gauges loans granted against deposits received, reflecting the extent to which a bank relies on deposits as a source of financing for loans. SAMA has updated the method for calculating this metric by assigning weights to long-term deposits and debt, favoring a ratio of less than 90%.

NSFR measures the sustainability of a bank's funding structure over the long term (one year). This ratio should not fall below 100% to ensure sufficient stable funding sources are available to cover long-term assets.

In this report, Argaam provides a comprehensive analysis of liquidity metrics in Saudi banks by the end of 2024.

1- LCR and HQLA: This criterion aims to ensure that a bank has a sufficient stock of unencumbered high-quality liquid assets, consisting of cash or assets that can be converted into cash with little or no loss in value in private markets, to meet liquidity needs within a 30-day period under a stress-based scenario.

At a minimum, the bank's high-quality, unencumbered liquid assets should enable it to continue operating until day 30 in periods of stress, at which point it is assumed that appropriate corrective action can be taken by management and supervisory authorities (the central bank), or the problem can be addressed in a systematic manner.

LCR = Stock of HQLAs/total net cash outflows over the next 30 calendar days ≥ 100%.

Saudi National Bank (SNB) topped the list of Saudi banks in terms of LCR at 265.23%, followed by The Saudi Investment Bank (SAIB) (164.67%) and Banque Saudi Fransi (BSF) (162%).

In terms of HQLAs, SNB also led with the bulk of SAR 169.37 billion. Al Rajhi Bank came in second at SAR 128.09 billion, while Saudi Awwal Bank (SAB) took the third place.

2- The adjusted LDR reported by SAMA: The adjusted LDR is defined as net loans divided by deposits after applying weights.

Net loans: Includes loans and advances, less provisions for credit losses, unearned commission income, and advance commissions.

Deposits: Includes deposits, repurchase transactions, and long-term debt (bonds and sukuk, syndicated loans, subordinated loans, and other debt (i.e., any other specified long-term debt).

SAMA expects local banks to maintain a total LDR below 90%.

By 2024-end, Bank AlJazira had the lowest LDR of 72.40%, followed by Bank Albilad (82%).

Meanwhile, during the same year, Al Rajhi Bank had the highest ratio of 85.5%. Riyad Bank came in second at 84.3%.

3- NSFR is defined as the amount of available stable funding (ASF) relative to the amount of required stable funding (RSF). This ratio must not be less than 100% on a regular basis.

ASF is the portion of capital and liabilities expected to be reliable over a predetermined one-year period by the NSFR.

The amount of ASF required for a given institution is determined based on the liquidity needs and remaining maturities of the various assets held by that institution, as well as the characteristics of its off-balance sheet exposures (OBS).

SAB topped the list of banks by NSFR at 117.67%, followed by Bank AlJazira (117.66%) and then Arab National Bank (ANB) (117.20%).

The following table shows Saudi banks’ NSFR by the end of 2024: