Dubai: The global banking system does not face any imminent threat to its creditworthiness from the recent sharp fall in oil price, but banks across oil exporting countries could face asset-quality and earnings deterioration, according to credit rating agency Moody’s.
The most immediate impact of lower oil prices on GCC banks will be felt on the liability side, notably reduced deposit inflows from large government and government-related entities that may reduce system liquidity.
Direct exposures for banks are limited but, depending on the policy responses, a sustained drop in oil prices could also have pronounced negative effects on public spending, confidence and economic growth.
“We expect any immediate impact on asset quality will be low and lag any protracted oil price decline due to the fact that the GCC credit cycle is in its early stages and banks have yet to revert to riskier underwriting habits as in past cycles,” said Robard Williams, a Moody’s Vice-President and Senior Credit Officer.
Moody’s expects banks in Qatar, Kuwait, Saudi Arabia and the UAE to be less affected as their governments utilise substantial sovereign wealth fund buffers to maintain spending.
The most immediately affected countries will be Bahrain and Oman, each of which has a fiscal break-even oil price above current and expected levels for 2015 and 2016 as well as a lower capacity to absorb the associated revenue decline.
Banks across the region could face some funding and liquidity pressures since governments, related entities and National Oil Companies (NOCs) are among the largest depositors in the system, providing around 10 per cent to 35 per cent of banks’ non-equity funding.
For most of the region’s banks, market funding is generally limited and liquidity buffers are healthy. GCC banks’ liquid assets are equivalent to around 30 per cent of total assets and loan to deposit ratios stand at 92 per cent, on average, leaving some headroom for banks to adjust to changing funding conditions in an orderly fashion.
“We consider asset quality pressures to be limited in the short term, given the capacity of most GCC governments to support their economies. Furthermore, neither corporate leverage nor equity prices have yet returned to the levels seen in 2006-07 and new macroprudential regulations on consumer and residential real-estate lending have also helped to reduce credit risk,” said Williams.
The Saudi Arabia and UAE banking systems are likely to be moderately affected in the midterm despite large reserve buffers (100 per cent and 140 per cent of GDP, respectively) and large non-oil sectors.
Analysts say although the UAE’s economy is more diversified and has a lower break-even price, Dubai’s open economy, aggressive leverage appetite and large confidence-sensitive real-estate sector could impact banks’ assets and earnings growth.
Credit rating agency Standard & Poor’s too has recently projected a moderation in growth outlook for UAE banks. “In the next two years, we expect a slowdown in credit growth and noticeably weaker deposit growth, with renewed but manageable pressure on asset quality. All of these factors combined should limit earnings growth for UAE banks in 2015 and 2016, to the mid-single digits,” Standard & Poor’s credit analyst Timucin Engin said earlier this week.
