Stabilising oil prices, large international sovereign debt issuances and lower credit growth will improve funding conditions for banks in the Gulf Cooperation Council (GCC) over the next 12 months, says Moody's Investors Service in a report recently published.
Price stabilisation between $40-$60 per barrel will improve oil revenues, supporting government and corporate deposits in the region's banking systems. International debt issuance will also support deposits, while slower economic growth will subdue lending activity and reduce funding pressures for banks.
"Omani and Qatari banks will benefit the most from easing funding conditions, followed by banks in Saudi Arabia and the United Arab Emirates," says Mik Kabeya, analyst at Moody's. "However, Bahraini and Kuwaiti banks will continue to have the strongest funding and liquidity profiles in the region."
According to Moody's report, ‘Banking - Gulf Cooperation Council: Stabilising Oil Prices and International Debt Issuances Will Ease Funding Pressures’, Omani and Qatari banks will benefit the most from the expected easing of liquidity, since they have been among the least resilient to a prolonged period of low oil prices.
Both banking systems face funding pressure as reflected by loan to deposit ratios of 103% and 104%, respectively, at June 2016.
However, the Qatar government (Aa2 negative) has higher financial reserves than the Oman government (Baa1 stable), providing it with a higher capacity to support local liquidity if necessary.
Funding conditions will stabilise for banks in the United Arab Emirates, which have a net loans to deposits ratio of 94% as of June 2016.
The funding squeeze experienced by Saudi banks since 2015 will ease, given the government's payment late in 2016 of around $28bn of overdue contractors bills and Moody's expectation of low credit growth.
In addition, Saudi banks will maintain ample liquidity buffers. Kuwaiti banks will remain primarily deposit funded and well-cushioned by liquid assets that amounted to 36% of tangible banking assets in October 2016. The banks are among the most liquid in the region, with a combined net loans to deposits ratio of 82% as of June 2016.
Bahraini banks will continue to exhibit one of the strongest funding and liquidity position in the region, with a net loans to deposits ratio of 76% at June 2016 and modest loan growth that will require low levels of new funding.