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Banking deposits to GDP ratio in Gulf region expected to decline

DUBAI — Banking deposits to GDP ratio in the Gulf region is expected to decline to around 50 per cent levels due to increased investments in other asset classes, industry observers predict.

Rising loan to deposit ratio adds pressure to the risk-weighted assets impacting the capital adequacy ratios of individual banks, according to a recent research by Gulf Investment House.

Similarly, as the interest rates of regional economies are pegged to the US dollar, a rising interest rate scenario going forward could cause margin improvement, but could have a fall-out on the volume borrowings from banks.

The report also forecasts a strong growth in non-interest income through rising fees and commissions, particularly higher brokerage fees relating to buoyant stock markets, investment management fees, fees on margin loans and trade financing fee.

All this combined with the rising credit card culture, which gives a boost to profitability and continued liquidity on the back of soaring oil revenues, could mean a double-digit growth in deposit base in the AGCC banking sector.

The report predicted that lending to the private sector would increase the private sector funding for expansion of the corporates both regionally and internationally. Similarly, banks will increase their focus on high-margin personal lending, which will rise due to demographic changes.

While construction lending is expected to be on the rise owing to housing and other real estate projects, spreads are likely to improve with the rising interest rates. The banks with significant chunks of customer deposits in the current accounts would be the ones to increase their margins the most.

The agency predicted that a possible opening up of the regional banking sector would put pressure on the existing regional banks especially in case of investment banking, project finance, wealth management and international banking activities.

Liberalisation has been the buzzword in the AGCC banking sector and Saudi Arabia and Kuwait have already opened up their banking sector as international banks set up bases in these countries.

There is also a visible trend towards Islamic banking and banks with strong franchises are likely to have an edge over their conventional counterparts.

While the UAE and Bahrain markets seem over banked, the consolidation activity is expected in the medium term, the report said.