GCC banks resilient to geopolitical escalation, S&P says

Arabian Gulf lenders have strong customer bases, rating agency says, and are unlikely to need state support

Oil tankers in the Strait of Hormuz through which much of the world's energy supplies are transported. Reuters

Banks in the Arabian Gulf are resilient enough and will not need government liquidity support if the regional geopolitical situation escalates on the back of ongoing US-Iran rift, said S&P Global Ratings.

Despite the recent rise in the tensions between the US and Iran, the ratings or outlook of any of the sovereigns in the region and their banks have so far not been affected, S&P said in a report on Monday. Most governments in the six-member economic bloc of GCC possess sufficient liquid assets and foreign exchange reserves to be in a position to support banks if that were required, the rating agency noted,

“For most banking systems in the GCC, strong customer bases support their system-wide funding profiles,” S&P said.

At the end of the last year, the average loan-to-deposit ratio for banks in the GCC reached 99 per cent. More than half of lenders' deposits came from retail customers and government-related entities, S&P noted.

The rating agency said in hypothetical bank funding-related stress tests designed to assess the credit situations of the lenders, GCC lenders do not require help from their governments in case of a "modest" escalation in the geopolitical situation in the region.

“The GCC banking systems should be able to absorb substantial foreign funding outflows without government support in a modest stress scenario,” it said. There may be “potential funding gaps” in the regional banking system for GCC countries aside from Kuwait, it noted.

In its base case scenario, S&P does not expect direct military conflict between the US and Iran or their regional allies. Tensions have risen in the aftermath of US sanctions on Iran and attacks on oil tankers in the Gulf over the past two months. Two vessels carrying crude from Saudi Arabia and the UAE sustained damage last month for which the US blamed on Iran. Tehran, however, denied any involvement.

S&P expects the Strait of Hormuz to remain open to the global oil trade. Nearly a third of the world’s seaborne crude, around 18.5 million barrels per day, passes through the strategic waterway.