Stabilizing oil prices, large international sovereign debt issuances and lower credit growth will improve funding conditions for banks in the GCC over the next 12 months.
Moody's Investors Service in a recent report, pointed out that Omani and Qatari banks will benefit the most from this, followed by banks in Saudi Arabia and the UAE. Bahraini and Kuwaiti banks are expected to continue exhibiting the strongest funding and liquidity profiles in the region.
Improved government oil revenues would support deposits from government and corporates. Moody’s expects oil prices to remain between $40-$60 through 2018, compared to $43 in 2016, with lows of $26 in early 2016. Stabilising oil prices are projected to increase regional government revenues due to their high reliance on hydrocarbons, although they remain below the fiscal break-even oil prices for most GCC countries.
As governments are large depositors in GCC banks, higher oil revenues will bolster deposit levels.
Higher government revenues will also promote public spending, which will limit the economic slowdown and boost both corporate and retail deposits.
In addition to the hike in oil prices, international sovereign debt issuances are also expected to support deposits. GCC governments are projected to continue to raise funding from international markets following a record issuance last year. These issuances will reduce the need to borrow from local banks and the money raised will flow at least partially as deposits into banks.
International sovereign debt issuance from the region increased from $2.1 billion in 2015 to $38.9 billion in 2016. Moody’s expects sovereign issuance from the region to reach approximately $32.5 billion this year (total issuances currently stand at $13.6 billion so far as of March 2017). Large GCC banks with an international footprint are also anticipated to raise funds in the global market.
Furthermore, lower credit demand will also reduce funding pressures. Slower economic growth in GCC countries will subdue lending activity and reduce banks’ funding needs. This will in turn reduce funding pressures, given the slow pace of deposit growth in most GCC banking systems.
Omani and Qatari banks are believed to benefit the most from these easing funding conditions, followed by banks in Saudi Arabia and the UAE. According to Moody’s, Omani and Qatari banks exhibit the highest net loans to deposit ratios in the GCC, providing little cushion to fund further loan growth. This reflects a combination of high government dependence on oil, high banking system dependence on government deposits and relatively rapid historical loan growth.
However, the Qatari government (Aa2, negative) benefits from considerably higher financial reserves than the Omani government (Baa1, stable), providing it with a higher capacity to support local liquidity if necessary.
Kuwaiti banks will remain primarily deposit funded and well-cushioned by liquid assets that amounted to 35 percent of tangible banking assets in September 2016. The banks will remain among the most liquid and the net interbank lenders in the region, despite increasing market funding reliance, as deposit growth slows. In contrast to some GCC peers, private and public-sector deposits in Kuwait have continued to grow despite the effect of low oil prices, albeit at a slower rate.
Bahraini banks will continue to exhibit the strongest funding and liquid position in the Gulf region, with a net loans to deposits ratios of 76 percent at June 2016 and modest loan growth that will require low levels of new funding. Liquidity buffers stood at 32 percent of tangible banking assets as of year-end 2015.
By Nabilah Annuar
© 2019 CPI Financial. All rights reserved.