Dubai: Liquidity positions of the GCC banks are expected to improve and reduce funding pressures during the next 12 months as oil prices stabilise, large international sovereign debt issuances and lower credit growth lower loans to deposit ratios, according to credit rating agency Moody’s.
“We expect oil prices to remain between $40-$60 (Dh147-Dh220) through 2018 compared to $43 in 2016, with lows of $26 in early 2016. Stabilising oil prices will increase government revenues given their high reliance on hydrocarbons, though they will remain below the fiscal break-even oil prices for most GCC countries. Since governments are large depositors in GCC banks, higher oil revenues will support deposit levels,” said Mik Kabeya, Analyst at Moody’s.
With government spending accounting for a major factor in economic growth in the GCC, improvements in government revenues are expected to boost private sector performance. Government spending accounted for 39.2 per cent of GDP in Qatar, 50.8 per cent in Oman, 34.4 per cent in Saudi Arabia, 52.5 per cent in Kuwait, 32.7 per cent in Bahrain and 30.3 per cent in the UAE.
“Higher government oil revenues will also support government spending, which will limit the economic growth slowdown and help to boost corporate and retail deposit flows. Government spending, which is correlated to oil revenues in the GCC, is one of the main drivers of economic activity in GCC countries given their limited economic diversification,” said Kabeya.
Least resilient
Omani and Qatari banks will benefit the most from the expected easing of liquidity, since they have been among the least resilient to a prolonged period of low oil prices. Both banking systems face funding pressure as reflected by loan to deposit ratios of 103 per cent and 104 per cent, respectively, at June 2016. However, the Qatar government has higher financial reserves than the Oman government providing it with a higher capacity to support local liquidity if necessary.
Lower credit demand in most markets are also expected to reduce funding pressures. Slower economic growth will subdue lending activity over the next 12 months. “In 2017, we expect non-oil real GDP growth of 6.5 per cent of in Qatar, 4.5 per cent in Kuwait, 3 per cent in Oman, 2.3 per cent in Bahrain, 2.5 per cent in the UAE and 2 per cent in Saudi Arabia.
Funding squeeze
Funding conditions will stabilise for banks in the UAE, which have a net loans to deposits ratio of 94 per cent as of June 2016. The funding squeeze experienced by Saudi banks since 2015 will ease, given the government’s payment late in 2016 of around $28 billion of overdue contractors bills and Moody’s expectation of low credit growth. Saudi banks are expected to maintain ample liquidity buffers.
Kuwaiti banks will remain primarily deposit funded and well-cushioned by liquid assets that amounted to 36 per cent of tangible banking assets in October 2016. These banks are among the most liquid in the region, with a combined net loans to deposits ratio of 82 per cent as of June 2016. Bahraini banks will continue to exhibit one of the strongest funding and liquidity position in the region, with a net loans to deposits ratio of 76 per cent at June 2016 and modest loan growth that will require low levels of new funding.
