Dubai: Outlook for the Gulf Cooperation Council (GCC) banks look stable in the year ahead due to strong operating environment supported by healthy capitalisation levels and robust asset quality.

Banks across the region went through a process of balance sheet repair following the financial crisis which involved sharp deleveraging, sustained provisioning for impaired loans and in some cases government supported recapitalisations.

Cleaner balance sheets and strong liquidity levels supported by expansionary fiscal policies have supported loan growth across the region during the last 3 years.

The UAE banking sector asset growth crept up to 15.4 per cent year on year in the third quarter of 2014 up from 11.9 per cent in 2013 and 8.3 per cent year on year in 2012. Loan growth during the first nine months of the year was 8.6 per cent year on year, accelerating from 7.7 per cent at end-2013 and 3.7 per cent at year end 2012.

Personal loan growth, which accounts for about 22 per cent of total bank loans, has grown at a much faster rate of 15.5 per cent year on year in November suggesting that individual/ retail demand for credit is particularly robust and that banks are increasingly willing to lend to this sector.

“The accelerating loan growth data provides further evidence [in addition to relatively high PMI readings] that non-oil sector activity has been strong in the fourth quarter of 2014, even as oil prices declined sharply,” said Khatija Haque, head of Mena Research at Emirates NBD.

While the loan growth picked up momentum, for the first 9 months of this year, most UAE banks reported robust growth in deposits. The sector’s loan to deposit ratio (LDR) stood at 97.7 per cent at end-September 2014, lower than the 108 per cent registered in 2008 when oil prices fell sharply and caused a liquidity squeeze in the system.

“Recent improvements in the performance of the banking sector support our view on the likely limited impact of lower oil prices on the UAE economy. The latest available data reported by Moody’s highlight slight improvement in the banks’ profitability on the back of higher asset growth and more moderate pace of provisioning,” said Alia Moubayed, an analyst with Barclays.

Abdul Aziz Al Ghurair, CEO of Mashreq said the fortunes of the UAE banking sector is closely linked to the economic growth. “Our growth is a reflection of the overall growth in the economy where we operate. If the economy continues to grow we will continue to report strong results,” he said

Al Ghurair does not expect to see any big scaling back of government spending in the near future. The UAE’s banking sector credit growth is expected to be about 10 per cent this year. “I think 10 per cent is a healthy loan growth rate for the banking sector and the economy and I expect the banking sector to maintain this growth levels in 2015,” he said.

Credit facilities extended by Kuwait banks during Q3-14 increased by 1.27 per cent KWD 30.62 billion at the end of Sep-2014 fuelled by growth in personal loans and credit to the real estate sector. Meanwhile, in Saudi Arabia, money supply (M2) increased by 3.43 per cent during Q3-14 to reach 1.5 trillion riyals after growing by 4.78 per cent and 2.9 per cent, respectively in the first and the second quarter.

“The stable outlook for GCC banks is driven by strong operating conditions coupled with expansionary fiscal policies and continued infrastructure spending, which remain supportive of credit growth” said Khalid Howladar, Senior Credit Officer at Moody’s. “However, declining oil prices if prolonged at these levels will reduce fiscal surpluses, affect economic confidence and moderate growth expectations,” he said.

Due to pegged exchange rate regimes, the modest increase in interest rates in the US beyond the first half of 2015 will result in higher domestic interest rates; however, the pass-through of policy rates to lending rates is generally weak in the GCC countries, and the impact of rising interest rates is likely to be limited. Inflation is expected to remain subdued, slightly less than 3 per cent, as food and nonfuel commodity prices decline further in 2015.