Global bank distress unlikely to affect Gulf lenders

Strong capitalisation, sovereign backing to keep region’s banks a safe haven


Issac John

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Banks in the UAE, in particular, remain strong with their capitalisation in good shape and well-insulated against the contagion of global banking crises.  - KT file
Banks in the UAE, in particular, remain strong with their capitalisation in good shape and well-insulated against the contagion of global banking crises. - KT file

Published: Sun 19 Mar 2023, 2:39 PM

Last updated: Sun 19 Mar 2023, 3:56 PM

A possible tightening of liquidity across global debt markets in the wake of the collapse of two US banks will have limited impact on most rated banks in Gulf countries, thanks to their broad franchises and sovereign footprint.

While the spillover effects of the US bank distress are still developing, broad franchises and large government presence on GCC banks’ balance sheet shields their financial performance from shocks, say analysts at Moody’s Investor Service.

Francesca Paolino and Badis Shubailat, Moody’s analysts, argue that GCC banks are also not materially exposed to the failed US banks and are not as susceptible to large losses from held-to-maturity debt securities.

US regulators closed Signature Bank on March 12, just two days after shutting Silicon Valley Bank, following mass withdrawals of customer deposits from these US regional banks. “The events have shaken investor confidence and will likely lead to tightening liquidity across global debt markets. Still, the impact will likely be limited for most rated banks in Gulf countries as they 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 as main shareholders, creating a supportive and interlinked operating environment,” Moody’s analysts wrote.

Most GCC governments are highly rated. 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, they said.

Banks in the UAE, in particular, remain strong with their capitalisation in good shape and well-insulated against the contagion of global banking crises, according to Alvarez & Marsal, a leading global professional services firm. They have also been reinforced by a remarkable surge in profitability. The top 10 UAE lenders’ profitability increased by 31.7 per cent in 2022 year-on-year as higher interest rates boost earnings. Deposits grew by 11.3 per cent YoY, faster than loans & advances.

In its latest analysis, S&P said the majority of GCC banks can manage any contagion risk from the bank failures as their US exposure is lower than 5.0 per cent of total assets. Besides, the banks also have good funding and liquidity profiles and are expected to receive government support “in case of need”.

Only five out of the 19 banks that S&P rate have more than 5.0 per cent of their assets in the US, while four banks have more than 5.0 per cent of liabilities to counterparts in the US. As of the end of last year, the rated banks’ exposure was pegged at 4.6 per cent of assets and 2.3 per cent of liabilities. “Generally, GCC banks would have limited lending activity in the US and most of their assets there would be in high-credit quality instruments or with the US Federal Reserve Bank,” S&P said in its report.

The Moody’s report noted that governments also provide lending opportunities to GCC banks that are playing a pivotal role in implementing the governments’ economic diversification agenda in the non-oil parts of the economy — where they conduct 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.

GCC banks remain largely funded by deposits, with sizable government deposit concentration 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,” Moody’s report argues.

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