UAE banks managed asset and liability maturities better than gulf peers, our analysis shows, as lenders globally battle rising market risk amid weak sentiment and aggressive inflation-fighting monetary policy. That threatens lenders’ traditional business of mobilizing short-term liquidity via deposits and deploying it in longer-term assets. Liquidity ratios such as 30-day stressed coverage or longer funding “NSFR” are on investors’ radar, but they aren’t immune from inherited risk in the assumption of core deposit stability. Gulf banks’ core deposits are largely made up of current and savings “CASA” no-maturity deposits. They’ve proven their stickiness with retail banks assigning up to five years on them under Basel rules. Yet assessing liquidity buffers in both 30 and 90 days to absorb stress on CASA outflow is crucial.
Our model allows us to calculate the cumulative funding gap for UAE, Saudi and Qatari banks under different scenarios for current and savings-deposit outflow rates. UAE banks fared better on managing their asset liability, keeping the short-term liquidity shortfall at 21% of their assets after assuming theoretically current account and savings account (CASA) at risk of outflow at 90 days vs. 55% for Saudi and 41% for Qatari peers.
UAE banks’ funding gap is less negative vs. peers in stress test
A liquidly gap is inherited risk within the banking model as lenders make profit from short-term borrowing or mobilizing cheap or free deposits, while lending at higher rates for longer. UAE and Saudi lenders’ funding is characterized by a large share of current and saving accounts (CASA) that have no contractual terms or can be withdrawn any time. Yet these CASA accounts have proven their stickiness, given limited alternative money-market savings vehicles, a large retail base and government-related entity support.
Assuming CASA in a stress test becomes outflows in the three-month liquidity bucket, the cumulative funding gap will turn negative for all banks, though UAE peers with liquidity buffers may absorb liquidity risk better. That may lead to shortfalls of 21% of their assets vs. 41% for Qatari and 55% for Saudi banks.
UAE bank on 14% cash buffer vs. Saudi peers 9% funding shortfall
Non-maturity demand and savings deposits (CASA) — largely retail funds — makes up large funding sources for UAE (44% of all deposits) and Saudi banks (57% of all deposits). We’re excluding them from the three-month liquidity gap to assess the buffer. UAE banks have a positive liquidity gap on all maturities. This creates a buffer to absorb migration of CASA into interest-bearing deposits in a rising interest-rate scenario or tightening liquidity or outflow of these deposits if in a case the deposits turned out to be unstable. Saudi peers’ funding gap turned negative on 3-12 month bucket last year vs. a year earlier, making up a 9% liquidity shortfall on total assets for 90-day period.
Qatari banks’ liquidity gap is negative as the majority of deposits are interest-bearing with short-term contractual terms.
Qatari banks negative funding gap on lower CASA
Qatari banks’ cumulative funding gap for 3-12-months is negative with or without current and savings deposits (CASA) because interest-bearing funds are a large funding source. These are contractually short-term deposits. Qatari banks’ liquidity shortfall is 41% (26% assuming sticky CASA) of total assets vs. a 55% shortfall for Saudi peers (9%), we calculate, but the risk only appears if the deposits aren’t renewed and become outflows.
A funding gap works as a backstop for liquidity coverage (LCR) or stable funding (NSFR) as these ratios favor retail deposits over wholesale on more stable or lower deposit outflows. In a scenario where retail deposits aren’t stable, the cumulative gap could better estimate the funding position when current and savings accounts are considered theoretical outflows in the three-month bucket.
Bloomberg
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