Third Quarter | 2023

Banks make money from sourcing cheap deposits from customers and selling them to borrowers for more. Arguably the most important determinant of a bank's value is its long-term outlook for cost of funding. With Gulf interest rates rising from about 1% to over 6% in eighteen months, many expected cheap demand deposits to fall sharply. They have not. Saudi demand deposits are down less than 3% in absolute terms and UAE banks have grown theirs, while other high-income, digitally developed economies have seen declines of up to 15% from their peaks. This Think Piece looks at sixty years of US money supply data, and recent experience elsewhere, to evaluate the outlook for Gulf demand deposits. We have spoken with many bank management teams, and they are no surer than we are. We do not think negative demand-deposit growth is a foregone conclusion, and we expect growth to return over the medium term if rates decline.