MOSCOW / CAIRO: The Gulf Cooperation Council banking sector continues to show signs of strength, with core customer deposits remaining the main source of funding for regional banks, according to an S&P Global Rating report.
The rating company said Saudi Arabia led the region in lending, which rose 7.9%. Business loans and mortgages dominated the scene.
The growth of Saudi bank lending pushed the GCC overall annualized rate to 8.4% in 2021, from 6.6% in 2020.
Compared to the Kingdom, GCC countries experienced slower growth in their loans offered. In particular, the United Arab Emirates experienced very low (annualized) loan growth; amounting to only 0.6 percent. However, S&P expects this to change in 2H 2021 with the start of Expo 2020.
Apart from Qatar, only Bahrain broke the 10% mark for the system-wide net external debt-to-lending ratio, while other countries such as Saudi Arabia and the United Arab Emirates reported negative values; a sign that the majority of banks in the region depend mainly on deposits from core customers and not on external funding.
On the other hand, Qatar’s banking system has dramatically increased its wholesale funding in recent years, with its system-wide net external debt-to-lending ratio approaching 40% for 2020 and forecast for 2021, according to S&P. Global Ratings.
The rating firm said: “Qatari banks are now vulnerable to a change in investor sentiment or a reduction in liquidity support measures from Western central banks. “
Customer deposits in the GCC grew by 6.6% on an annualized basis in the first half of 2021, a slight increase from the 6.3% recorded in 2019. This increase is due to the increase in consumer spending and operations businesses, following the resumption of the negative effects of the crisis. pandemic in 2020.
The report noted that interventions by western and local central banks were among the main reasons protecting GCC banks from uncertainty and deteriorating asset quality. They provided regional banks with much needed liquidity injections and regulatory forbearance.
The asset quality of Islamic banks and conventional banks was also compared in the report. The quality of assets did not differ much between the two types of banks, with the NPL ratio of Islamic banks standing at 3.5% as of June 30, 2021, compared to 4% slightly higher for conventional banks.
Islamic banks again maintained a slight lead on the coverage ratio, registering 157.3% in the first half of 2021 while the ratio of conventional banks stood at 139.5%.
S&P added that: “We consider these ratios comparable and don’t read much about the slight differences between the segments.”
The report points out that Islamic banks generally have higher exposure to the real estate sector than conventional banks due to the asset collateral principle of Islamic finance, resulting in greater collateral.
The report pointed out that “the realization of guarantees is still difficult in the GCC. Additionally, real estate is the preferred form of collateral and has declined in value in most GCC markets over the past three years. “
The UAE also saw the biggest deterioration in asset quality, with its NPL ratio reaching 6.6% in the first half of 2021. This was due to a fraud case involving a large corporation and strains on the sectors. construction, real estate and hotels.
The region’s NPL ratio averaged 3.8 percent in mid-2021, up from 3.1 percent at the end of 2019, according to the S&P sample of banks.
S&P expects it to rise further over the next 12-24 months while remaining below 6%.