Dubai: GCC's banking sector is expected face continued slowdown in growth, deterioration of asset quality, and reduced profitability in 2016, according to rating agency Standard & Poor’s.
“Lower economic growth means fewer growth opportunities for banks in the GCC. We expect loan growth in the region will reach around 6 per cent on average in 2016 compared with around 10 per cent in 2015. We think this slowdown will persist in 2017, with growth stabilizing at around 5 per cent,” Mohammad Damak, S&P Global ratings analyst
Lower oil prices mean lower liquidity, as deposits from governments and their related entities account for between 20 per cent and 40 per cent of the deposit base of GCC banks, and this inflow of money depends heavily on oil prices.
With the decline in liquidity, the cost of funding for banks has increased.
In the same vein, the drop in economic growth has exposed the most vulnerable borrowers, primarily subcontractors and small and midsize enterprises, leading to higher default rates and provisioning needs.
“Overall, we think that not only will banks' loan growth decline, but profitability will also drop, prompting some banks to take a closer look at their efficiency and potentially triggering mergers or acquisitions. The trend started in June 2016, with the announced merger between two banks in Abu Dhabi, First Gulf Bank and National Bank of Abu Dhabi, to create one of the largest banks in the region,” said Damak.
On a positive note, S&P expects that the deterioration will be largely controlled and that banks have the capacity to absorb the negative impacts thanks to their strong asset quality, good profitability, and strong capitalization.
