GCC banks could face capital and liquidity shortfall
GCC banks must better manage their capital and liquidity positions or face substantial shortfalls, according to a recent study by Booz & Company.
The capital shortfall for GCC and Levant banks could increase from about $11 billion in total in 2012 to a range of $12 billion to $27 billion in 2017, based on various economic scenarios.
Management consulting firm Booz & Company recently conducted a study of capitalisation and liquidity levels at 64 regional banks. The results were sobering, as many institutions face the prospect of capital and liquidity shortfalls in the near term, particularly as Basel III rules are phased in between 2013 and 2018. In response, banks will need to manage their capital and liquidity levels more proactively, and soon.
Since the financial crisis, capital and liquidity support from GCC and Levant regulators has helped keep the banking sector relatively strong. Across the region, governments acted fast to inject liquidity into the system by placing long-term government deposits into banks. In Bahrain, Oman, and Saudi Arabia regulators also lowered interest rates and modified reserve requirements to improve the liquidity situation. To support capital positions, Kuwait and the UAE made direct capital injections and Qatar purchased bank assets.
Although the governments’ capital and liquidity initiatives have helped keep regional banks solvent and strong to date, Booz & Company’s study found that many of these banks could soon face capital and liquidity shortfalls.
To a large extent, the new capital and liquidity ratios under Basel III have not yet been finalised, but with the implementation phase around the corner, Booz & Company ran several scenarios based on the most likely new ratios. According to the analysis, the new minimum capital requirements set by the Basel Committee and local regulators will significantly affect banks, including systemically important financial institutions (SIFI). The new requirements are much more stringent, and they call for meticulous and recurrent capital planning that is integrated into the overall strategy of the banks.
Based on 2012 performance, 15 of the 64 banks could fail to meet a capital requirement of 16 per cent, and 29 of the banks could fail to meet a capital requirement of 18 per cent,” said Mazen Najjar, a Partner with Booz & Company. “To get an idea of how banks would perform in the future, we also ran two economic scenarios for 2017: one assuming growth in line with the projected expansion in GDP and another assuming decelerated growth. The results for the downside scenario were sobering.”
In effect, under the downside scenario, 28 banks could fail to meet the 16 per cent capital requirement while 39 institutions could fail to meet the 18 per cent capital requirement.
The picture is similar, though somewhat better, when looking at core capital. For instance, based on 2012 performance, two banks could fail to meet a new core capital requirement of 9.5 per cent, 11 could fall short if the level was at 12 per cent, and 22 could fail were the level raised to 14.5 per cent. In a 2017 downside scenario, 25 banks could fail to meet the 14.5 per cent threshold.
On the liquidity side, Basel III introduces two new ratios, The Liquidity Coverage Ratio (LCR) and The Net Stable Funding Ratio (NSFR), to improve the banking sector’s ability to absorb shocks arising from financial and economic stress, thus reducing the risk of spillover from the financial sector to the real economy.