Global banking crisis unlikely to affect GCC banks, says Moody’s
Gulf banks have adequate liquidity buffers, low reliance on market funding
KUWAIT: Banks in the Gulf Cooperation Council (GCC) region are strongly interlinked with their respective sovereigns and are unexposed to recently failed US banks, stated the global credit rating agency Moody’s Investor Service. A possible tightening of liquidity across global debt markets in the wake of the banks will have only limited impact on most-rated banks in Gulf countries, it said in a report.
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. GCC banks’ broad franchises and large government presence across the banks’ balance sheets support their resilience. The rating agency noted that banks in the GCC region often have large franchises in retail and corporate banking. Governments in the region are primarily represented across the balance sheets of banks as principal shareholders, borrowers, and depositors, which fosters a cooperative and interconnected operating environment, according to Moody’s.
The report added that the region continues to own direct and indirect stock shares in the banking system through public-sector institutions, pension funds, and companies. They support the banks’ funding profiles with constant deposit inflows, which have expanded due to rising oil revenues in 2022. Additionally, governments also provide lending opportunities to GCC banks, which play a critical role in implementing governments’ economic diversification agendas in nonoil sectors of the economy - where they conduct most of their lending activities - which are backed by government spending. “All these factors ensure GCC banks remain core to the regional economies and will protect them against sudden market shocks,” Moody’s said in the report.
As of December 2022, across the GCC banking systems, low-cost and reliable client deposits made by customers cover the majority of non-equity liabilities held by GCC banks, accounting for almost three-quarters of total liabilities. On the Islamic finance front, Islamic financing is rapidly expanding across the GCC banking institutions because deposits at these banks are less expensive than at traditional banks and help the banks’ profitability, notably during times of high-interest rates, according to the ratings agency’s report.
Moody’s also highlighted how Gulf banks have adequate liquidity buffers and low reliance on confidence-sensitive market funding. 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. 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.
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.
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”.