Muscat: Sukuk issuance was muted last year and, contrary to some market commentators, S&P Global Ratings does not believe this was primarily due to the drop in Gulf banks' liquidity.
The rating agency believes that the Gulf Cooperation Council (GCC) liquidity remains adequate in global comparison and that banks may respond to the lack of growth opportunities by reallocating some liquidity to the bond and sukuk markets. Also, while about one-half of sukuk investors were based in the GCC region in 2014-2016, a large portion is based outside, mainly in Asia and Europe, S&P said.
GCC liquidity impact
S&P said the GCC Islamic banks are among the main investors in sukuk and the Islamic finance industry remains dominated by banking, which accounted for over 80 per cent of the industry's $2.1 trillion assets as of 2016-end. This statement is somewhat confirmed by the distribution of the sukuk market's investor base.
However, over the past two years, S&P has observed a reduction in liquidity in the GCC banking systems. The agency uses system-level data rather than Islamic banking data because not all the central banks in the region publish granular data on Islamic banks.
S&P has confirmed this finding by looking at a representative sample of 16 Islamic banks in the GCC with total assets of $438.5 billion as of June 30, 2016. Growth in GCC banks' customer deposits slowed down to 2.4 per cent in the first nine months of 2016, compared to 5.4 per cent in 2015. The agency expects this trend will continue in 2017 and 2018.
This is because governments and their related entities, whose deposits depend on oil prices, contributed between 12 per cent and 35 per cent of the total deposits of GCC banks by Sept. 30, 2016, and oil prices have been projected to stabilise at around $50 per barrel in 2017-2018.
Despite this drop, the GCC banks still have some cards to play. The banks’funding profile remains strong by international standards, as it is mostly dominated by core customer deposits with an average loan to deposit ratio of 91 per cent as of Sept. 30, 2016.
Moreover, the GCC banks tend to keep sizable amounts of cash and money market instruments on their balance sheets (around 18 per cent of the total assets as of Sept. 30, 2016). It is worth noting that this ratio has dropped from around 22 per cent at 2014-end, yet compares favourably with that of global peers.
In the current challenging operating environment marked by lower opportunities for growth, S&P thinks that some GCC banks might divert a portion of this liquidity towards assets that generate higher income. In this context, bonds and sukuk are attractive, compared to interbank deposits or deposits with the central banks.
Who invests in sukuk?
To answer this question, S&P looked at a sample of 29 sukuk issued in US dollars during 2014-2016. Its sample included 12 sukuk issued by GCC-domiciled issuers and 17 sukuk issued by non-GCC-domiciled issuers.
The results showed that about 50 per cent of sukuk investors were based in the GCC. This was followed by Asian and European investors, which accounted for 23 per cent and 19 per cent of the investor base, respectively. The US-based investors made up only 8 per cent and invested mainly in sovereign sukuk issued in Asia and GCC countries.
However, given the small number of sukuk in the sample, S&P considers this data to be only indicative of distribution of sukuk investors.