Rising oil prices have largely lifted what has been three years of intense funding pressure for banks in the Gulf Cooperation Council (GCC) countries as government deposits increase, says Moody's Investors Service in a new report.
The Brent crude oil price averaged $43.5 a barrel in 2016 and $54.3 in 2017, up from the lows of around $26 in January 2016.
"We expect GCC banks to benefit from continued deposit growth over the coming quarters, driven mainly by government deposits as their oil revenues improve and they tap international markets to fund their budget deficits," said Ashraf Madani, Vice President—Senior Analyst at Moody's.
GCC banks' liquidity will be further supported by expected average credit growth of around five per cent in the region, although growth in Qatar should be above the average. Increased government deposits should continue to support a stable loan to deposit ratio for GCC banks.
Despite improved liquidity, funding costs will increase due to rising interest rates. Over the past four years, GCC benchmark interest rates have risen in line with US Federal Reserve fund rate increases and subsequent moves by local central banks.
Moody's expects benchmark rates to continue their upward trend in line with US rate rises. Rising interest rates will support net interest margins and will benefit banking systems with the highest current and saving accounts (CASA), particularly Saudi Arabia. Despite increasing funding costs, banks will be able to raise rates on their corporate loans and will benefit from the higher spread to be earned on CASAs.