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GCC banks likely to face challenges from weak economic growth in 2017-18

Capital buffers to keep banks resilient, but asset quality to fall, S&P analyst says

Gulf News

Dubai: Weak economic environment will continue weigh on the financial profiles of banks across the Gulf Cooperation Council (GCC) countries in 2017 and 2018, according to banking sector analysts.

“The end of the commodities boom has also increased the pressure on GCC banks’ asset quality and profitability indicators. While we expect to see further weakening in some of these indicators in 2017-2018, we think that GCC banks have built sufficient buffers to make the overall impact on their financial profiles manageable,” said S&P global Ratings credit analyst Mohammad Damak.

Over the past one year loan growth to private sector has taken a beating. Growth in lending to the private sector halved to 5 per cent on average as of September 30, 2016, compared with 10 per cent in 2015. In 2017-2018, S&P analysts expect this situation to continue as the government’s policy response to lower oil prices continues to take the form of spending cuts and the postponement of infrastructure projects.

“Under our base-case scenario, we expect private sector lending growth to reach 5 to 7 per cent on average for the banking systems of the six GCC countries for 2017-2018, supported by strategic initiatives such as the Dubai Expo 2020, the World Cup 2022 in Qatar, and the ongoing increase in government spending in Kuwait,” Damak said.

The less-supportive economic environment is expected to result in further deterioration in asset quality. As of September 30, 2016, these indicators plateaued for the GCC banks and analysts see further deterioration in 2017-2018.

S&P expects the downward trend to last for at least two years, barring any unexpected increase in hydrocarbons prices. The rating agency assumes oil prices to stabilise at $50 per barrel in 2017 and 2018, and forecast unweighted average economic growth for the six GCC countries of 2.2 per cent in 2017 and 2.5 per cent in 2018.

Rated banks in the GCC continued to display good asset quality indicators, profitability, and capitalisation in 2016 by global standards, albeit with signs of deterioration from 2015. Over the past year, S&P has taken several negative rating actions on banks in the GCC. Most of these were concentrated in Bahrain, Oman, and Saudi Arabia.

After a slight decline in the first nine months of 2016, GCC banks’ profitability is projected to continue to deteriorate in 2017 and 2018. “Growth opportunities will become increasingly scarce as governments — with the exception of Kuwait—cut their expenses to cope with the lower oil prices. We also think that banks will become more selective and prioritise quality and risk profile over quantity and profitability,” said Suha Urgan, an analyst at S&P.

Overall cost of funding is expected to increase due to lower liquidity, a direct consequence of the low oil prices and increase in interest rates.

Growth in customer deposits slowed to 2.4 per cent in the first nine months of 2016, compared to 5.4 per cent in 2015, for banks in the GCC. “We expect the trend of slowing customer deposits growth to continue in 2017 and 2018. This is because governments and their related entities-whose deposits depend on oil prices-contributed between 12 per cent and 35 per cent of the total deposits of GCC banks at September 30, 2016, and we project that oil prices will remain low,” Damak said.

This situation is somewhat counterbalanced that GCC banks’ funding profile remains strong by international standards. It is mostly dominated by core customer deposits, while the use of wholesale funding remains limited, except for a few large and sophisticated issuers. The GCC banking system’s loan-to-deposit ratio averaged 91.0 per cent at September 30, 2016, compared with 88.8 per cent at year-end 2015, ranging from a high 116.9 per cent for Qatar to a low 54.2 per cent for Bahraini retail banks.

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