Dubai: Credit losses of Gulf banks which were on a decline for the past five years is seen rising from the second half of this year according to credit rating agency Standard & Poor’s.

“Over the past few years, GCC banks’ declining credit losses were a key driver of earnings growth and resilience in return on average assets. But after five years of decline, credit losses are set to rise for Gulf banks as they cope with slowing growth and capital market volatility. We expect Gulf banks’ net income growth to decline below 10 per cent in 2015 and potentially slow further in 2016,” said Standard & Poor’s credit analyst Suha Urgan.

Analysts expect credit losses for GCC banks to begin increasing over the next several quarters, as nonperforming loans move above 3 per cent. Specifically, the credit losses are expected to become visible in the last quarter of 2015.

Loan recovery in the past three years has been helped by strong asset prices for real estate and equities, for instance, which kept the value of banks’ collateral high.

“Today, we no longer view asset prices as a positive factor in recovery. Indeed, we expect continued volatility in the equities market, in line with movements in oil prices. For certain markets such as the UAE, we also expect to see a continued correction in real estate prices, potentially further contributing to credit losses,” said Standard & Poor’s analyst Timucin Engin.

At the end of the first half of 2015, the ratio of non-performing loans to gross loans for S&P rated GCC banks declined to below 2 per cent, while the loan loss coverage ratio stood at a healthy 142 per cent.

GCC banks generally operate with healthy liquidity metrics, but may come under pressure from what S&P analysts expect to be a visible change in the liquidity conditions in the Gulf banking markets next year.

Interbank rate

Market funding is expected to become more expensive, by the looks of the Gulf’s two largest markets — Saudi Arabia and the UAE. The three-month Saudi Arabia interbank offered rate and UAE interbank offered rate have risen around 10 basis points (bps) over the past three months.

In the GCC, customer deposits remain the main source of funding for banks, accounting for 70 per cent-85 per cent of the banking system’s liabilities.

“We’re already seeing weakness in deposits by governments and public-sector entities, traditionally important providers of funding, as a result of lower oil prices. For example, in the first half, government deposits declined 14 per cent in the UAE and 3 per cent in Saudi Arabia, while government and public sector deposits in Qatar remained flat,” said Urgan.