UAE banks are in a comfortable net external asset position and their loan to deposit ratios are among the strongest in the region, S&P said in a report on GCC banking.
Banks have been accumulating local deposits over the past 15 months amid muted lending growth. S&P said it does not expect an acceleration of lending, so UAE banks’ funding profiles should continue to strengthen.
One potential downside risk for banks is the country’s expatriate-dominated population. This means deposits could be prone to higher volatility during extreme shocks, although they have mostly been stable through past tensions. Moreover, the country is considered a safe haven and tends to benefit from geopolitical instability in the region and beyond via an uptick in local deposits. We also expect that the federal authorities would be highly supportive of the banking system, if needed.
Absent local growth, banks have increasingly deployed their assets outside the country, resulting in a strong net asset position of about 23% of domestic lending. Related risks are mitigated by banks’ relatively conservative approach toward foreign asset deployment. S&P expects this position to moderate in the future should lending growth pick up again.
The availability of a well-functioning domestic debt capital market can make a significant difference for a banking sector’s funding opportunities. In terms of relative stability, funding sourced from the domestic debt capital market tends to be more stable than cross-border funds, but less stable than core customer deposits.
Having a broad and deep local debt capital market can therefore help a banking system reduce its dependence on external funding and ease concentration and maturity mismatches.
In Saudi Arabia, for example, the presence of a broad and deep capital market could support the implementation of Vision 2030 projects, since we think that the banking system alone won’t have sufficient capacity. Saudi banks can also benefit from being able to securitize part of their mortgage books to free up their balance sheets and reduce maturity mismatches.
The report said regional governments have already issued local-currency-denominated bonds or sukuk to help build a local yield curve, notably in Saudi Arabia or more recently in the UAE with the federal government’s sukuk issuances. Local capital markets could also help mobilize resources to finance diversification away from oil and the transition to greener economies.
Also published on Medium.
