RIYADH: 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.