GCC banks may need govt support if geopolitical risks rise sharply

July 10, 2019

If the geopolitical tensions in the region increase sharply in the future, the banks in the GCC countries may require sovereign support, according to S&P Global Ratings.

In a report published on Monday, S&P said that tensions between the US and Iran have increased, but it has not changed any bank or sovereign ratings or outlooks in the GCC. ‘This is because, in our base case, we do not expect direct military conflict between the two countries or their regional allies. Furthermore, we expect the Strait of Hormuz to remain open to the global oil trade.’

S&P said that the GCC banking systems should be able to absorb foreign funding outflows without government support in its hypothetical ‘modest’ stress scenario. However, in our more ‘severe’ hypothetical stress scenario, we see potential funding gaps in all banking systems aside from Kuwait’s, with Qatari and Bahraini banks requiring the most support as a proportion of gross domestic product, it said.

The ratings agency said that most GCC governments possess sufficient liquid assets and foreign exchange reserves to support banks under S&P’s hypothetical stress scenarios, but such support could weigh on some sovereigns’ fiscal and external profiles.

‘If the Strait of Hormuz were blocked [even for a few days], or if there is a significant escalation in tensions between allies of either the US or Iran that could affect Gulf countries, the potential related loss of investor confidence could weigh on the ratings of GCC banks and sovereigns,’ S&P said.

S&P said, for most banking systems in the GCC, strong customer bases support their systemwide funding profiles. At year-end 2018, the loan-to-deposit ratio reached 99 per cent on average for the six GCC countries. Moreover, about 52 per cent of deposits came from retail customers and government-related entities (GREs) for the same period. Qatar had the biggest share of retail and GRE deposits at about 70 per cent and Bahrain and Oman had the lowest at about 45 per cent at year-end 2018.

According to S&P, the GCC banking system’s total external debt is relatively limited, except for Qatar and to a lesser extend Bahrain. Oman has a small net external debt position.

‘Geopolitical risk has been part of daily life for GCC citizens and corporates for several decades. However, over the past three years, and particularly in recent months, geopolitical risk has risen, in our opinion,’ S&P said.

Under its first hypothetical scenario, S&P expects that most GCC countries would display strong resilience and would be able to finance outflows using their own internal sources or by liquidating their own external assets. ‘Under our second hypothetical scenario, which we view as highly unlikely to occur, all systems aside from Kuwait would have a funding gap and would require government or central bank support.’

The global ratings agency also suggests that foreign exchange reserves could be used to support banks and offset the withdrawal of external liabilities, as was the case in Qatar during the 2017 boycott.