GCC banks’ funding pressures ease on rising oil prices in 2017

However, funding costs will increase due to rising interest rates, the ratings agency observed

Commuters walk past a bank sign along a road. Image used for illustrative purpose.

Commuters walk past a bank sign along a road. Image used for illustrative purpose.

REUTERS/Anindito Mukherjee

Increased government deposits on the back of rising oil prices has helped ease funding pressures for GCC banks leading to a stable loan to deposit ratio.

Moody's Investors Service expects GCC banks to benefit from continued deposit growth over the coming quarters, driven mainly by government deposits as their oil revenues improve and they tap international markets to fund their budget deficits.

The Brent crude oil price averaged $43.5 a barrel in 2016 and $54.3 in 2017, up from the lows of around $26 in January 2016.

Ashraf Madani, vice-president, senior analyst at Moody's, said GCC banks' liquidity would be further supported by expected average credit growth of around five per cent in the region, although growth in Qatar should be above the average.

"Increased government deposits should continue to support a stable loan to deposit ratio for GCC banks," he said in the report, "Banking - Gulf Cooperation Council: Funding pressures have lifted for GCC banks and margins resilient to rising rates."

However, despite improved liquidity, funding costs will increase due to rising interest rates, the ratings agency observed.

"Over the past four years, GCC benchmark interest rates have risen in line with US Federal Reserve fund rate increases and subsequent moves by local central banks. Moody's expects benchmark rates to continue their upward trend in line with US rate rises."

Rising interest rates will support net interest margins and will benefit banking systems with the highest current and saving accounts (CASA), particularly Saudi Arabia. Despite increasing funding costs, banks will be able to raise rates on their corporate loans and will benefit from the higher spread to be earned on CASAs, Moody's said. In another report, Moody's said the credit fundamentals of Islamic banks operating in the GCC countries have converged with those of their conventional peers and they should maintain their improved asset quality and profitability in the coming year. However, the Islamic banks' still high loan concentration to real estate-related sector and higher asset growth remain key moderating factors in Moody's assessment of their standalone profiles, the report said.

"Islamic banks operating in the GCC have benefited from sustained growth in their franchises in recent years," said Nitish Bhojnagarwala, vice-president, senior analyst and author of the report.

"Their solvency has improved, supported by their efforts to reduce the stock of problem loans, and by their sound profitability."

"While both Islamic and conventional banks in GCC countries reported non-performing loan (NPL) ratios of around five per cent at the end of 2011, Islamic banks reported a larger decline in subsequent years, to around 2.1 per cent at the end of 2017, compared to 2.9 per cent for conventional banks," said Bhojnagarwala.

Moody's also expects the Islamic banks' NPL ratios to remain low in the next few quarters, underpinned by three factors: Their continued resolution of legacy impairments primarily related to the real estate sector; the lower new NPL formation as a result of their more selective and diversified credit growth and a significant denominator effect from stronger loan growth.
The ratings agency also anticipates that Islamic banks in the GCC will continue to report higher net profitability compared with their conventional peers.

"While GCC Islamic banks have maintained higher capital adequacy than their conventional peers, this gap has been narrowing as a result of the Islamic banks' stronger asset growth, a trend that Moody's expects to continue. Nevertheless, their capital buffers will continue to be supported by their stronger profitability and provide a comfortable cushion to absorb potential losses," said Bhojnagarwala. 

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