Dubai: Banks in the Gulf Cooperation Council (GCC) region will experience more “pronounced” slowdown in 2016 and 2017 due to weak economic environment, a ratings agency said on Tuesday.
S&P Global Ratings Agency issued a report on Tuesday detailing how the current sluggish environment will impact the region's banking sector, particularly the Islamic banks.
As of 2015, customer deposits in Islamic banks already slowed to 9.2 per cent, compared with 16.9 per cent in 2014. The trend is expected to continue this year and in 2017, given that oil price-dependent deposits of government and their related entities account for between 15 per cent and 40 per cent of total GCC bank deposits.
S&P predicts that Islamic banks' profitability will also deteriorate during the same period, while the slowdown in the economy will be more pronounced in Saudi Arabia and UAE.
The oil price has dropped by more than 70 per cent since mid-2014, creating challenges for growth, and fiscal and external hurdles for the GCC countries.
"In Saudi Arabia, we expect that the government will cut spending by close to 15 per cent. In the UAE, we see the current trend in the real estate sector resulting in fewer growth opportunities for Islamic banks, althouth investments related to Dubai Expo should help create some opportunities."
“Nevertheless, we think that GCC Islamic banks have built sufficient buffers to navigate through this new environment with manageable deterioration of their financial profiles,” S&P Global Ratings said in Tuesday.
“We also think that the current environment is creating an opportunity for the local regulators to start inching closer to more stringent application of Islamic finance's profit and loss sharing principle.”
The drop in the oil price that started since the second half of 2014 resulted in a significant slowdown of the GCC economies and reduced growth opportunities for their banking systems.
S&P Global Ratings now forecasts oil prices to hit US$50 per barrel in 2018, with unweighted average economic growth of the six GCC countries of 2.1 per cent in 2016 and 2.5 per cent in 2017.
“As a result, we expect a more pronounced slowdown of the growth of both conventional and Islamic banks in the GCC. Asset growth started to moderate in 2015, reaching 7.0 per cent for Islamic and 5.7 per cent for conventional banks in 2015, compared with 12.3 per cent and 9.6 per cent, respectively, in 2014.”
“In our base-case scenario, we assume that growth will drop to around 5% for both types of banks in 2016 as governments strive to restore their fiscal sustainability through a mix of spending cuts and revenue-boosting initiatives.”
