GCC banks push on with funding; customer deposits remain main source

MOSCOW/CAIRO: The Gulf Cooperation Council’s (GCC) banking sector continues to show signs of strengths with core customer deposits remaining the main source of funding for the regional banks, Arab News quoted a report by S&P Global rating, as saying.

The ratings firm said Saudi Arabia led the region in lending, which grew 7.9 per cent. Corporate lending and mortgage activity dominated the scene.

The growth in the Saudi banks’ lending pushed the overall GCC annualised rate to 8.4 per cent in 2021, up from 6.6 per cent in 2020.

The GCC countries recorded slower growth in their offered loans. Most notably, the UAE had a very small (annualised) growth in lending; amounting only to 0.6 per cent; however, S&P expects this to change in the second-half of 2021 with the start of Expo 2020.

Apart from Qatar, only Bahrain exceeded the 10 per cent mark for the net external debt/system-wide loans ratio, while other countries such as Saudi Arabia and the UAE reported negative values; a sign that the majority of the banks in the region are mainly depending on core customer deposits not external funding.

Qatar’s banking system increased its wholesale funding significantly in the last few years, as its net external debt/system-wide loans ratio was nearing 40 per cent for 2020 and the 2021 forecast, S&P Global Ratings showed.

The ratings firm said: “Qatari banks are now vulnerable to a shift in investors’ sentiment or a scaling back of Western central banks’ liquidity support measures.”

The customers’ deposits in the GCC grew an annualised 6.6 per cent in the first-half of 2021, a slight increase from the 6.3 per cent recorded in 2019. This rise was driven by jumps in consumer spending and corporate activities, following recovery from the adverse effects of the pandemic in 2020.

The report said that the Western and local central banks’ interventions were among the primary reasons that protected the GCC banks from uncertainty and deteriorations in asset quality.

They provided regional banks with the much-needed liquidity injections and regulatory forbearance measures.

Islamic banks and conventional banks’ asset quality were also compared in the report. Asset quality did not differ much between the two types of banks, as Islamic banks’ non-performing loans (NPLs) ratio stood at 3.5 per cent on June 30, 2021, compared with the slightly higher 4 per cent for conventional banks.

The Islamic banks’ maintained a slim upper-hand again in the coverage ratio, recording 157.3 per cent in the first-half of 2021, while conventional banks’ ratio amounted to 139.5 per cent.

The S&P said: “We consider these ratios comparable and don’t read much into the slight differences between the segments.”

The report points out that the Islamic banks usually have a higher exposure to the real estate sector than conventional banks due to the asset backing principle of Islamic finance, which results in higher collateralisation.

The report stressed that “collateral realisation is still difficult in the GCC. In addition, real estate is the preferred form of collateral and its value has been declining in most GCC markets over the last three years.”

The UAE also experienced the biggest deterioration in asset quality, as its NPL ratio reached 6.6 per cent in the first-half of 2021. This is due to a fraud case involving a large corporation and strains on the construction, real estate and hospitality sectors.

The entire region’s NPL ratio rose to 3.8 per cent on average at mid-year 2021, up from 3.1 per cent at the end of 2019, according to the S&P’s sample of banks.

The S&P expects it to further rise in the next 12 to 24 months, while staying below 6 per cent.

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