Dubai: Banks in the Gulf Cooperation Council (GCC) reported a good set of earnings in the first half of 2015 thanks in part to declining credit losses but, owing to the knock-on effects of lower oil prices on growth and asset quality, earnings could weaken over the next several quarters according to Standard & Poor’s analysts.

An analysis of a sample of 26 rated banks from the GCC showed aggregate asset and loan growth declined to the single digits, compared with double-digit quarterly growth since early 2013.

Kuwaiti banks in the sample fared the worst, on an annualised basis, with no asset growth in the first half, compared with 9 per cent growth in both 2014 and 2013. In contrast, Qatari banks were the only group to have posted annualised asset growth of around 15 per cent, surpassing last year.

“In line with our expectations, banks seem to have adopted a more conservative stance in terms of asset growth, given the drop in oil prices and its effects on the region’s economic outlook,” said Standard & Poor’s credit analyst Suha Urgan.

The deleveraging of government-related entities (GREs) in Qatar, tighter mortgage regulation in Saudi Arabia, and a drop in real estate transactions in the UAE also held back asset growth.

The analysis showed that customer deposits too lost momentum in the first half. The GCC banks in the sample increased customer deposits 6 per cent year on year in the first and second quarters, compared with more than 10 per cent year on year in all of the previous eight quarters. In the UAE in particular, several banks saw a sharper slowdown due to the drawdown of deposits from the government and GREs.

Signs of weakness

Growth in aggregate operating income for the GCC banks in the sample studied dropped to 3 per cent year on year from 6 per cent year on year in 2014 and 10 per cent in 2013. “Signs of weakness are evident in both interest income and noninterest income. Simply put, the squeeze on interest margins has not yet eased. Low interest rates are returning less on bank assets, but funding costs are gradually increasing,” said Standard & Poor’s analyst Timucin Engin.

Non-interest income had partly offset the squeeze on interest margins, but also weakened. Out of the 26 banks in Standard & Poor’s sample, 10 posted a year-on-year contraction in non-interest income in the first half of the year. Other areas of weakness were a contraction in fees for loan origination, brokerage, and capital market activities.

Earnings growth was more resilient thanks to declining provisions, which helped offset slower growth in operating income. Provisions declined 9 per cent year on year in the first half. Net income growth declined to 4 per cent year on year in the second quarter, compared with 7 per cent in the first quarter and more than 10 per cent in the previous three quarters.