Dubai: Lower oil prices are set to end a run of bumper earnings for banks in the Gulf, one of a number of headwinds as lenders report first quarter results.
While the steep fall in oil prices is a concern to banks, a more immediate impact may be felt from retail banking rules, bad loan worries and property sector weakness.
Lower oil revenues have yet to lead to a significant drying up of liquidity. Banks remain exposed if oil prices remain under pressure in the medium-term as deposits from the government, quasi-government bodies and national oil companies provide around 10 per cent to 35 per cent of their non-equity funding, according to Moody’s Investors Service.
“At the moment, local banks have been somewhat insulated as governments have huge reserves so can draw down from foreign reserves, foreign banks or local banks,” said Redmond Ramsdale, regional director of financial institutions at Fitch Ratings.
Banks in Saudi Arabia, home to the largest oil reserves in the Gulf, are naturally among the most exposed.
Chiradeep Ghosh, banking analyst at Bahraini investment bank SICO, said he expected “flattish growth” for the kingdom’s banks in the first quarter.
Riyad Bank, Saudi Arabia’s third-largest listed lender by assets, reported an 8.6 per cent increase in its first-quarter net profit on Tuesday.
Appetite for retail credit will be curbed by Saudi mortgage rules introduced last November, capping the maximum loan-to-value ratio at 70 per cent. Most banks previously extended mortgage loans around an 80 per cent loan-to-value ratio.
Some banks are already grappling with a cap on retail fees, a move that has already dented earnings at Al Rajhi Bank, the kingdom’s second-largest lender, since its introduction last year.
Banks may also feel the pain from their exposure to troubled telecommunications firm Etihad Etisalat (Mobily), which amounts to about 14 billion riyals ($3.73 billion), according to estimates by Al Jazira Capital.
Lenders may set aside extra provisions, especially if they’re pressured by the kingdom’s regulator, which has been proactive in the past about making banks build safeguards.
Lower provisions
Bank earnings in the UAE are likely to be the strongest in the Gulf.
A strengthening domestic economy has meant banks have had to gradually set aside fewer provisions to cover bad debt. That process was boosted last month when Dubai World said it had gained 100 per cent creditor approval for its $14.6 billion (Dh53.6 billion) debt restructuring plan.
However, lower oil prices, together with softness in the property and equities markets, may ultimately require banks to reverse that downward trend, leading to additional provisions against a fresh wave of bad loans. It is unclear whether that trend may emerge in the first quarter.
