Dubai: Capital levels in Gulf Cooperation Council (GCC) banks will remain broadly stable and well above Basel III minimum regulatory requirements in a context of modest credit growth in 2018, according to Moody’s.
Combined tangible common equity (TCE) ratios will remain broadly in the range of 11-16 per cent. Problem loan coverage, at around 95 per cent plus across the region, is high.
Low cost and stable deposit based funding, combined with elevated liquidity buffers will remain a credit strength of GCC banks in 2018.
In 2017, governments injected liquidity from international debt issuances, thereby easing a lengthy funding squeeze which had stemmed from low oil prices.
“The strong financial fundamentals in the Gulf banking systems make the industry more resilient to lower profitability and weaker loan quality issues, said Olivier Panis, a Vice-President and Senior Credit Officer at Moody’s.
Banks in the region have generally adapted their cost structure to a lower growth environment, and rising yields on loans will partly offset increasing funding costs as the US dollar-pegged GCC economies follow US Federal Reserve interest-rate hikes.
The high proportion of non-interest bearing deposits in the region renders banks’ liabilities less sensitive to interest-rate hikes than their assets.
GCC bank funding is anchored by low-cost and stable deposits. A lengthy funding squeeze, stemming from low oil prices, eased in 2017 after governments injected liquidity from international debt issuances. However, private-sector deposit growth remains low and the banks’ heightened dependence on public-sector deposits increases their vulnerability to deposit volatility.
“Recourse to confidence-sensitive market funding will remain low at around 13 per cent of total assets, but some countries [Bahrain, Qatar] are heavily exposed to confidence-sensitive foreign liabilities,” said Panis.
Liquidity buffers across the banks remain high with liquid assets are in the range of 20-30 per cent of total assets and the vast majority of banks compliant with Basel III liquidity coverage ratio requirements. Historically GCC banks enjoy strong government support in the event of stress, but capacity is facing pressure in countries facing higher fiscal pressures, which could lead governments to become more selective in their support for banks.
Banking systems with a higher proportion of market funding, such as Qatar, and a higher reliance on foreign funding, such as Bahrain, would face greater funding cost pressure if GCC geopolitical tensions were to rise.
Capitalisation levels to remain strong
GCC banks are expected to maintain robust capital levels for the next two years, according a recent assessment by credit rating agency Standard & Poor’s.
The latest tally of their risk-adjusted capital (RAC) ratios, based on their year-end 2016 financial disclosures and S&P’s own assessment as of mid-October 2017, the rating agency has calculated an unweighted average capital ratio of 11.5 per cent for the Gulf banks. Looking ahead, they expect the RAC ratios to remain relatively stable in the next 12 to 24 months.
“This result underpins our strong or very strong assessments of capital and earnings for 72 per cent of the Gulf banks we rate. Their quality of capital remains strong, even though we have observed higher recourse to hybrid instruments over the past few years,” said S&P Global Ratings credit analyst Mohamed Damak.
Credit risk and particularly exposure to corporates dominate the calculation of Gulf banks’ risk-adjusted assets. Despite the high 11.5 per cent average RAC ratio as of year-end 2016, it masks significant disparities among rated banks, ranging from 5.3 per cent to 17 per cent.
S&P rated banks based in the UAE, Saudi Arabia, and Qatar enjoy the highest capitalisation while the weakest capitalisation, but still adequate, is for rated Bahraini banks. The average capitalisation for Bahraini banks and some Kuwaiti banks is weighed down by their exposures to riskier countries such as Turkey and others in the Middle East.
The average Tier 1 capital ratio for rated banks according to local regulatory measures reached 16.3 per cent at year-end 2016. At year-end 2016, eligible hybrid instruments represented on average 9 per cent of total adjusted capital (TAC).
Among the GCC banks, the strongest quality of capital were reported in Oman and Saudi Arabia where capital almost exclusively comprises Tier 1 instruments. The weakest quality of capital is in Qatar where hybrid capital instruments contributed to 26 per cent of TAC on average. In addition, banks in the UAE and Kuwait have made moderate recourse to AT1 [additional tier 1 capital including convertible bonds] capital instruments over the past few years.
Most Gulf banks’ capital-raising exercises in the past few years were with AT1 instruments instead of core equity injections. That’s mainly because core equity has been relatively more expensive given the favorable liquidity conditions globally.
Originally published on www.gulftimes.com