Dubai: A gradual weakening in economic conditions for the GCC sovereigns resulting from the sharp decline in oil prices over that last one year is expected to reflect on the credit and deposit growth, profitability and asset quality of regional banks, according to credit rating agency Standard & Poor’s.
S&P expects Brent to average $55 per barrel in 2015, $65 in 2016, and around $75 in 2017, accordingly the rating agency has revised the ratings of regional sovereigns in the first quarter of this year followed by changes in its opinion about the risk or creditworthiness of their banking systems.
Although analysts at S&P do not expect a sharp slowdown in economic growth and credit growth followed by deterioration in asset quality metrics, they said there will be all-round moderation in the banking sector.
“We expect less of a pronounced slowdown in domestic credit growth than in economic growth over the next two years. That’s because none of the GCC sovereigns has announced any major cutbacks in infrastructure spending. However, we do expect a modest slowdown in projects related to the oil sector. And we expect banks to be generally more selective about loans for longer-term projects, which require longer-term funding,” said Standard & Poor’s credit analyst Timucin Engin.
S&P has forecast 8.5 per cent to 9 per cent credit growth in 2015 and 2016 for the GCC banking system, compared with 9.8 per cent in 2014, and 10 per cent growth a year earlier. As a result, domestic credit in the GCC (excluding credit exposures to non-residents and exposures of Bahraini wholesale banks) is projected to grow to $1.2 trillion (Dh4.4 trillion) by end-2016, from about $1 trillion at year-end 2014.
If the oil price decline is to persist over a longer period, the rating agency expects a much stronger impact on domestic credit growth via reduced government spending. Infrastructure spending by cash-rich Gulf governments is traditionally an important driver of corporate activity and domestic credit growth in the region. “Given that the GCC sovereigns are highly dependent on hydrocarbon revenues, they could arguably reduce infrastructure spending to contain widening budget deficits, if oil prices are lower than we assume or for longer,” said Engin.
The rating agency expects slower growth in the retail banking segment in the UAE this year, and domestic credit growth to come in at about 8 per cent for 2015 and 2016 compared to about 9.5 per cent in 2014.
In Saudi domestic credit growth to private sector is expected to be in high single digits for 2015-2016. Government spending is likely to remain stable. Credit growth in Qatar has been slowing visibly since 2013 in line with a noticeable slowdown in public-sector lending.
“Although we expect the Qatari government to continue to invest in all key projects, we understand that implementation will be more gradual and some noncore projects will be cancelled. We expect domestic credit growth to slow further to about 10 per cent in 2015 and 2016, from 13 per cent in 2014,” he said.
In Kuwait domestic credit growth was 6.2 per cent in 2014, lower than 8.1 per cent in 2013, largely due to a 12 per cent contraction in exposure to nonbank financial institutions. Retail growth was strong at 10.4 per cent last year is expected to remain same this year. While Oman’s credit growth is expected to be in the range of 7 to 8 per cent Bahrain’s domestic credit growth is expected to be limited to low single digits.