GCC banks set to record 6% credit growth in 2016

Banks in the GCC have the capacity to absorb any negative impact thanks to their strong asset quality, good profitability and strong capitalisation, says S&P Global Ratings.

Loan growth of GCC banks will be around six per cent on average in 2016 compared with around 10 per cent in 2015 on the back of lower economic growth, S&P Global Ratings said.
"We think this slowdown will persist in 2017, with growth stabilising at around five per cent," the ratings agency said in a report.
"Lower oil prices mean lower liquidity, as deposits from governments and their related entities account for between 20 per cent and 40 per cent of the deposit base of GCC banks, and this inflow of money depends heavily on oil prices," said the report.
With the decline in liquidity, the cost of funding for banks has increased. In the same vein, the drop in economic growth has exposed the most vulnerable borrowers, primarily sub-contractors and small and mid-size enterprises, leading to higher default rates and provisioning needs, S&P Global said.
"Overall, we think that not only will banks' loan growth decline, but profitability will also drop, prompting some banks to take a closer look at their efficiency and potentially triggering mergers or acquisitions. The trend started in June 2016, with the announced merger between two banks in Abu Dhabi, First Gulf Bank and National Bank of Abu Dhabi, to create one of the largest banks in the region," it said.
According to the latest data available, net income for the banks operating in the Abu Dhabi decreased from Dh7.74 billion in the second quarter of 2015 to Dh7.71 billion in the second quarter of 2016.
The ratings agency, however, noted that GCC banks have the capacity to absorb the negative impacts thanks to their strong asset quality, good profitability and strong capitalisation. The ratings agency also expects the pressure on banks' liquidity in the GCC to ease, owing to lower loan growth and governments tapping foreign capital markets or their own reserves to inject liquidity locally.
According to an International Monetary Fund working paper, a fall in oil prices and the slowing down of gross domestic product (GDP) growth rate in the Gulf countries could lead to an increase in non-performing loans of banks. The working paper entitled, "The impact of oil prices on the banking system in the GCC", said that data on actual and projected oil price performance for 2015 to 2020 suggests that oil prices will, on average, remain 50 to 60 per cent below the 2014 peak in the medium term.
"GCC banks had strong capital and liquidity buffers as of end-2014. Capital buffers and provisioning levels were above those in many other commodity exporting countries. The NPL ratios are low and both loan loss provisions and profits were strong. In fact, provisions fully cover NPLs, on average. Strong macroeconomic performance helped, so did strengthened regulatory frameworks and improved risk management. "However, liquidity conditions have started tightening more recently. While credit growth has remained robust, deposit growth has slowed, largely as governments and government-related entities have withdrawn deposits from the banking system," added the IMF working paper.
S&P report said banks in other emerging markets including Nigeria, Russia, South Africa, and Turkey will also remain under pressure for the remainder of 2016 and 2017.
"The operating environments in these emerging banking markets are suffering the effects of low commodity prices on economic growth and investment activity, still significant political and geopolitical risks, and weakening local currencies outside the GCC," said S&P Global ratings analyst Mohamed Damak.
"Positively, over the past few months, we have seen a slow return of foreign investors to some of these markets because interest rates remain low or negative in developing markets and investors are actively hunting for higher yield," said Damak.
Two important factors could influence the overall performance of banks in countries in our study, According to S&P. On the downside would be an unexpected additional drop in commodities prices or materialisation of idiosyncratic risks such as political risks or lack of economic reforms. On the upside, however, a continuation of the recovery in capital inflows observed over the past few months could ease the liquidity pressure in some of these markets, it said.
"Overall, we expect the trend of deteriorating financial performance to continue, as demonstrated by the negative outlook or CreditWatch negative (negative bias) on our bank ratings in these countries," said Damak.
-   issacjohn@khaleejtimes.com

Issac John

issacjohn@khaleejtimes.com