GCC banks weathered geopolitical shocks 'remarkably' well in past 30 years, S&P says

Private domestic deposits have grown year on year during the reporting period despite disruptive regional events

First Abu Dhabi Bank, the UAE's largest lender by assets. S&P says GCC banks have a stable base supported by their retail and corporate deposits. Chris Whiteoak / The National

Banks in the Arabian Gulf have remained “remarkably stable” in the face of regional geopolitical shocks over the past three decades and can withstand substantial external funding outflows without the need for support, S&P Global Ratings has said.

Geopolitical disruptions tend to trigger investors’ risk aversion, a rise in funding costs and the possibility of capital outflows from financial institutions in higher-risk markets, even when events are not directly related to them.

However, that has not been the case for the banking sector in the six-member GCC economic bloc, Mohamed Damak, senior director, and Benjamin Young, director of financial institution ratings at S&P, wrote in a joint report.

Private domestic deposits — their largest source of funding — have grown year on year over the past three decades, despite disruptive regional events.

Only during the First Gulf War was a drop recorded in private sector domestic deposits. However, related withdrawals were only temporary, they said.

“Large outward remittances have reduced the stock of potentially less stable deposits, and confidence boosting actions by public sector entities have helped reduce domestic funding volatility during shocks,” Mr Damak and Mr Young said.

“Meanwhile, corporate activity and consistent population growth have also underpinned deposit expansion and offset outflows,” they said, while the GCC's relative “safe-haven status” has also helped to attract stable funding from higher-risk geographies.

Banks in the Gulf have benefitted from the rapid expansion of GCC economies over the past three decades.

Sovereigns have redirected large parts of their oil and gas revenue into their economies. This has accelerated the creation of wealth in the region and boosted the growth of the retail and corporate sectors.

Regional governments have also invested heavily in infrastructure development, opened up new avenues of business for commercial banks.

Higher energy prices in recent years have further boosted their growth and profitability as policymakers focus on developing new-age economic sectors to sustain the pace of GDP expansion.

S&P said external funding in the GCC has traditionally been limited and “we generally expect domestic deposits to be more stable because they form the working capital and savings of residents”.

The stock of gross financial sector external liabilities grew substantially over the past few decades and now stands at slightly under $550 billion, the rating agency said.

On average, banks in the GCC comprise about a third of their economies' total external liabilities, with lenders in Oman and Saudi Arabian accounting for under 10 per cent of total liabilities.

Financial institutions in Qatar and Kuwait account for more than 40 per cent of their respective external liabilities.

Banking systems in the UAE, Kuwait and Saudi Arabian are in “modest net external asset positions” while lenders in Oman are small net debtors.

Those in Bahrain and the Qatar have a “more material net external debt position”, S&P said.

The bankable population in regional economies is also growing amid recent regulatory changes to boost economic growth.

Amendments in residency rules and companies’ laws allow medium to higher-income employees in the corporate sector to remain in the region for longer, which further supports the banking system.

The growth of multinationals and family owned businesses in the region has also significantly increased the amount of local working capital and treasury operations for banks.

From 2001 to 2016, corporate deposits grew faster than retail deposits in Qatar and the UAE. However, retail deposits in both markets have expanded more quickly since then, according to S&P.

Wealthy public sectors in GCC countries also “support bank deposit stability”, as income from the sale of oil and gas underpins deposit growth in the public sector.

The S&P stress test shows that Saudi and Kuwaiti banks have the highest coverage of external liabilities.

UAE banks also enjoy “a strong coverage ratio of about 92 per cent [as of September 30, 2021], which is underpinned by their net asset position”, the rating agency said.