Arab News, Monday, Mar 20, 2023 | Sha'ban 28, 1444
GCC banks resilient to US banks’ recent distress: Moody’s
Saudi Arabia:
Banks in the Gulf Cooperation Council region are strongly interlinked with their
respective sovereigns and are unexposed to recently failed US banks, stated the
global credit rating agency Moody’s.
GCC banks' broad franchises and large government
presence across the banks’ balance sheets support their resilience, according to
a recent report by Moody’s Investors Service.
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.
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 non-oil sectors of the
economy — where they conduct most of their lending activities — which are backed
by government spending, particularly in Saudi Arabia.
“All these factors ensure GCC banks remain core to
the regional economies and will protect them against sudden market shocks,”
Moody’s said in a statement.
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.
As of year-end 2022, Saudi Arabia has the largest
Islamic banking franchise, with quasi-zero-cost deposits accounting for 55
percent of total deposits (Islamic and conventional), 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.
“We expect banks' recourse to more volatile market
funding to remain stable, averaging around 20 percent 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 stated.
They also added that Saudi banks tend to retain
longer-term bonds, a good portion of their held-to-maturity books comprising
floating-rate securities.