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Funding structure of GCC banks to remain stable despite slow deposit growth

Funding structure of GCC banks to remain stable despite slow deposit growth

DUBAI: The overall funding structure of GCC banks are expected to remain stable despite slowing deposit growth according to analysts. Bank funding profiles remain anchored by stable deposits representing 75 per cent to 90 per cent of non-equity funding. However, deposit growth has slowed to 1.2 per cent in the region ranging from a -3 per cent up to June 2016 in Saudi Arabia to +6 per cent in Qatar last year, compared to 3.6 per cent in 2015 and 9.8 per cent in 2014. Clearly the deposit growth averaged below the level of credit growth of 9 per cent year on year as of June 2016. Lower oil revenues are leading to a decline or slowdown in government and related entity (GRE) deposits, and lower economic growth means broad reductions in corporate and retail deposit inflows.

High deposit concentrations, particularly government and related-entity deposits, expose banks to potential deposit volatility. Recent international bond and sukuk issuances from Abu Dhabi, Oman, Qatar and Saudi Arabia have helped to moderate liquidity pressures. “Additional market funding will be needed from relatively expensive and more confidence-sensitive interbank and capital markets, and we expect it to climb to around 10 per cent to 25 per cent of tangible banking assets from 5 per cent to 20 per cent,” said Olivier Panis, vice-president and senior credit officer — banking at Moody’s.

Despite increased appetite for market issuance due to a slowdown in deposit growth, debt issuance is expected remain low in the GCC in 2017 as customer deposits remain very significant and relatively cheap for banks. “We do not expect any bank to rely on large-scale debt issuance in 2017. However, issuance is likely to accelerate, mostly in the form of senior instruments — both conventional bond and sukuk issues — but also Tier 2 and additional Tier 1 instruments so that banks can maintain or boost regulatory total capital ratios,” said Redmond Ramsdale, Senior Director, Financial Institutions at Fitch Ratings. The most active issuers in 2017 are likely to be the UAE banks, and possibly the Qatari banks. Overall, liquidity buffers are expected to remain high at around 20 to 30 per cent of total system assets, although they will decline as the banks’ loan-to-deposit ratios increase. Slower credit growth will moderate funding and liquidity pressure.

Most regional banks comply with Basel III Liquidity Coverage Ratio (LCR) and already exceed the 2018-2019 target of 100 per cent with 170 per cent on average as of December 2015. Analysts expect capital ratios in the GCC to remain largely unchanged in 2017, above international peers. However, the region faces event risks due to highly concentrated loan books in terms of borrowers and sectors. Region’s banks could face risk to capital ratios from rise in interest rates (GCC governments tend to follow the US Federal Reserve rate moves due to the currency pegs) and the indirect impact on the mark-to-market value of the banks’ bond portfolios. Nevertheless, any impact on capital ratios should be limited, and those banks willing to do so could use their comfortable profits to set aside higher securities related reserves.