GCC banks are resilient to US banks' distress: Moody's

Business Monday 20/March/2023 18:27 PM
By: Times News Service
GCC banks are resilient to US banks' distress: Moody's
Photo used for illustrative purpose only

Muscat: With the spillover effects of the US bank distress still developing, however, the impact will likely be limited for most rated banks in the Gulf Cooperation Council (GCC) region, according to a new report. “This is due to structural features including their broad franchises and large government presence across the banks' balance sheets,” the global credit rating agency Moody’s said.

“Also, GCC banks are not materially exposed to the failed US banks and are not as susceptible to large losses from held-to-maturity debt securities,” the report further stated.

Broad franchises and large government presence on banks' balance sheets shield their financial performance from shocks, the credit rating agency said.

Banks in the six nations of the Gulf Cooperation Council (GCC) generally have broad franchises across retail and corporate banking. GCC banks are strongly interlinked with their respective sovereigns. For the most part, the footprint of governments in the region can be found right across banks' balance sheets - as borrowers, depositors and main shareholders, creating a supportive and interlinked operating environment.

The report further said that most GCC governments are highly rated and they maintain equity stakes in the banking systems, both directly and indirectly through public-sector institutions, pension funds and companies. They anchor the banks' funding profiles through inflows of stable deposits, which have increased thanks to higher oil-related government revenues in 2022. Governments also provide lending opportunities to GCC banks that are playing a pivotal role in implementing the government's economic diversification agendas in the non-oil parts of the economy - where they conduct the bulk of their lending activities – which are supported by government spending, notably in Saudi Arabia.

All these factors ensure GCC banks remain core to the regional economies and will protect them against sudden market shocks.

Also, the report said that the GCC banks remain largely funded by deposits, with sizeable government deposit concentration. The GCC banks are largely funded by low-cost and stable customer deposits representing around three-quarters of non-equity liabilities. Gulf economies are dominated by the governments, their related entities and a few large family-owned conglomerates, leading to significant deposit concentrations.

Government and public-sector deposits average around 30 per cent of total deposits as of December 2022 across the GCC banking systems. However, these governments and public-sector entities have a strong track record as stable depositors even in bad times, such as the oil crisis in 2015 and the COVID-19 outbreak. The economic interests of these parties are therefore closely linked.

Furthermore, Islamic finance is growing rapidly across GCC banking systems. Deposits at these banks are lower cost than at conventional banks and support the banks' profitability, particularly at times of high-interest rates. Saudi Arabia remains the largest Islamic banking franchise, where quasi-zero-cost deposits account for 55 per cent of total deposits (Islamic and conventional) as of year-end 2022.
The Credit rating agency Moody's further said that the stable related party funding at these banks, combined with shareholder structures dominated by a concentrated pool of state-linked entities and groups, limit the risk of deposits run-off and protects them against the kind of asset-liability risks exacerbated by rising interest rates in the current context.

Solid liquidity buffers and modest reliance on more volatile market funding are key strengths
GCC banks hold ample liquidity buffers and their reliance on confidence-sensitive market funding is modest. Their liquid assets to total assets range between 22 per cent and 38 per cent and they exceed Basel III liquidity coverage and net stable funding ratios.

“We expect banks' recourse to more volatile market funding to remain stable, averaging around 20 per cent of tangible banking assets, except in Saudi Arabia where the banks will likely seek additional market funding in light of substantial credit demand,” Moody's said in its report.