Funding risk is a prominent topic among investors in GCC banks, particularly as the financial industry transitions from cheap and abundant liquidity to a more restrictive environment. Major central banks have made it clear that interest rates will be higher for longer, meaning liquidity will be scarcer and more expensive. This could significantly affect banking systems in emerging markets, according to a new S&P Global Ratings (S&P) report that explores key questions from investors on the vulnerability of Gulf Cooperation Council (GCC) banks to funding risk and mitigating factors.
The study revealed UAE banks are in a comfortable net external asset position and their loan-to-deposit ratios are among the strongest in the region. Banks have been accumulating local deposits over the past 15 months amid muted lending growth.
The report did not expect an acceleration of lending, so UAE banks’ funding profiles should continue to strengthen. One potential downside risk for banks is the country’s expatriate-dominated population. This means deposits could be prone to higher volatility during extreme shocks, although they have mostly been stable through past tensions.
Saudi Arabia and Kuwait are the two GCC banking systems where the agency sees low funding risk. Core customer deposits dominate the funding profiles of banks in these two systems. Moreover, these deposits have proved resilient and stable amid different episodes of geopolitical instability or oil price declines. A portion is from the national governments and their related entities–20% in Kuwait and 30% in Saudi Arabia. In Kuwait, the loan-to-deposit ratio reached 96.9% on March 31, 2023, and in Saudi Arabia, it barely exceeded 100% on the same date.
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Additionally, Qatari banks have a high recourse to external funding. The system’s loan-to-deposit ratio reached 124% on March 31, 2023, or 152% on the same date. This resulted in an overall funding gap (total domestic loans minus total resident deposits) of $112.4 billion, equivalent to almost two times the public sector deposits.
Bahrain’s retail banks (onshore banks) have large and expanding net external liabilities. On March 31, 2023, they reached 26% of total domestic lending. S&P noted that 40% of the foreign liabilities are interbank and 60% are sourced from the GCC.
Moreover, the findings revealed on March 31, 2023, the system’s loan-to-deposit ratio in Oman was 110%, resulting in some recourse to external funding. Positively, such recourse remains relatively limited with the banking system’s net external debt position representing 3.7% of total lending on the same date. S&P noted that about one-third of total deposits come from the government and its related entities. The agency has observed the relative stability of these funds over the past few years; however, this dependency could result in some pressure on the banking system, particularly in periods of low oil prices.
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