Dubai - Tenor mismatches in the asset/liability structure of GCC banks' have been growing in the recent years forcing many banks in the region to find innovative ways to bridge the funding gap, according to a report on GCC banking sector by HSBC.
The mismatches in balance sheets have traditionally existed, with the government securities holdings and the credit-lending facilities being funded out of relatively short-term deposits. Due to the nature of GCC banks' short-term lending in the past (mainly fulfilling working capital requirements for corporates) asset liability mismatch was manageable. Significant liquidity provided a cushion, as reflected by a loans-to-deposit ratio of under 70 per cent for most GCC banks. In addition, the banks were supported by strong shareholders who were expected to provide financial support in the event of any liquidity gap. Accelerated economic growth has pushed the ALM issue into the spotlight. "Over the past 18-24 months, the issue of rising tenor mismatch has attracted considerable interest from both GCC-based banks and regulators. This has been a result of significant lending in areas of project finance and personal lending, which generally have longer tenors," said Adnan Afzal, Senior Associate Research, Corporate, Investment Banking and Markets.
Personal lending has grown rapidly at a five-year CAGR of 21.6 per cent, compared with a 13.4 per cent rise in corporate lending over the same period, causing banks to rethink their asset liability management strategy
To address the issue of growing tenor mismatch, many banks have taken steps to diversify their funding base by accessing the capital markets. Taking the lead was National Bank of Kuwait (NBK), which issued a $45Om three-year floating rate note (FRN) priced at 25bp over LIBOR in 2002. Since then, a number of institutions have followed suit, trying to reduce their funding mismatch concerns by issuing FRNs or undertaking EMTN programmes. Islamic bonds or sukuks have also gained popularity with banks, allowing them to access a specific liquidity pool, which was previously untapped because of the absence of shariah-compliant instruments.
Project financing requirements are estimated to total upwards of $2OO billion over the next five years. The bulk of the borrowing needs are likely to be related to the oil & gas and the independent water and power projects (IWPP) sectors and mainly concentrated in three GCC countries, Saudi Arabia, Qatar and UAE.
To address the issue of widening asset liability mismatches, banks have expressed growing interest in complementing their funding base by securing long-term funds through the capital markets. However, this does not mean that regional banks will be substituting their cheap deposit base with bond instruments. Easy access to cheap deposits has been one of the main advantages of the GCC banking sector, funding nearly 65 per cent of the assets. A fair amount of GCC depositors shun interest, because it (riba) is regarded as going against the teachings of Islam, thus providing banks with a relatively cheaper source of funding.
According to the report, the bond issues are only going to strengthen the funding base of the GCC banks, allowing them to accommodate the imminent sharp rise in long-term lending demand with relative ease. The timing has also proved opportune for the banking sector, as regional governments have fast-tracked their efforts to set up the required regulatory infrastructure for efficient capital markets.
By Babu Das Augustine
© Khaleej Times 2005
