GCC bank ratings at risk as governments pull deposits

Moody’s warned that GCC banks could face renewed pressure on their credit ratings, even as new data showed that government withdrawals continued into January.

Government deposits at UAE banks fell by 11.6 per cent in the 12 months to January, scraping levels last reached in 2011, data from the Central Bank shows.

Total deposits, including from the private sector and residents, continued to rise on an annualised basis, climbing by 4.2 per cent against the previous year. But monthly deposit growth has crawled to a halt, with deposits in January falling by 0.03 per cent against last December.

Oil prices scraped 12-year lows in January, as Opec states produced 33.1 million barrels – the bloc’s highest-ever output. Low oil prices have led government-related entities to pull their cash out of banks as they seek to make up for lost revenues from slower growth and cheaper commodities.

That is hitting bank operating conditions, the ratings agency Moody’s said in a research note published on Monday.

“Liquidity has been tightening due to significantly reduced deposit inflows from government and government-related entities,” Moody’s wrote in a research note. “Destabilising outflows have been avoided, how­ever, partly because GCC governments have relied on borrowing instead of significantly depleting their cash balances held in the banking system.”

Nonperforming loans could increase if the low oil price continues.

An IMF analysis said that the region’s weakest banks could face increases in nonperforming loans of up to 18.5 per cent after three years, if the oil price remains at current levels.

“Nonperforming loans will increase because the economy’s slowing, and as it slows, things may turn for the worse going forward,” said Sanyalak Manibhandu, the head of research at National Bank of Abu Dhabi.

Falling deposits are more likely to lead to slower loan growth, rather than worsening the liq­uidity positions of domestic banks, Mr Manibhandu said.

“What may happen is that if banks want to continue to lend at current rates, they will prob­ably have to raise capital.”

Moody’s believes that spending cuts might make Gulf governments less able or willing to intervene in their domestic banking systems, if a liquidity crisis occurs.

“Lower government financial reserves could lead to a shift in policy towards more selective support” for domestic banks, the ratings agency said.

After the global financial crisis of 2008 hit the Gulf, Abu Dhabi recapitalised local banks, while Qatar’s government stepped in to guarantee deposits. But Mr Manibhandu thought that the government would remain willing to step in if need be. “Nobody is seeing that there is a need for either the federal government or Abu Dhabi government to [support banks] … [but] they would do it if they needed to do it,” he said.

Saif Al Shamsi, the UAE Central Bank’s assistant governor for monetary policy and financial stability, told Reuters that commercial banks have “very comfortable” levels of liquidity.

Follow The National's Business section on Twitter