Lower oil prices test GCC banks' resilience: Moody's

Risks are limited as lending to energy sector is relatively low

GCC banks' ratings continue to benefit from governments' willingness to tap accumulated wealth to support countercyclical spending despite low oil revenues, but continued price slump will have an increasingly negative impact on banks across the GCC, Moody's Investors Service said.
The negative impact, the ratings agency said, could occur both directly - by a weakening in governments' capacity and willingness to support domestic banks - and indirectly, through a weakening of banks' operating conditions.
Khalid Howladar, a senior credit officer at Moody's and co-author of the report entitled "Low oil prices challenge banks' resilience", said continued oil price declines signal increasing challenges to the sustainability of this dynamic sector.
Within the GCC, Bahraini and Omani banks are already facing pressure on their credit profiles, primarily because of their weaker local economies and more limited resources of their domestic governments, according to the rating agency.
Moody's notes that lower government reserves could also lead to a shift in policy towards more selective support, with the more systemically important and government owned banks likely to be more favoured.
GCC banks' credit profiles could also be negatively affected indirectly, through weakening operating conditions from reduced public spending and declining inflows of government-related deposits.
Standard & Poor's also said it expects a slowdown in credit growth and noticeably weaker deposit growth, with renewed but manageable pressure on asset quality. S&P believes the uncertainty about how long oil prices will remain weak will force businesses and government to adopt a conservative stance, which will weaken spending for infrastructure and private-sector investments, and rein in bank lending. "We are likely to see a gradual but longer deterioration in operating conditions for banks over the next several quarters or years," it said.
"Reallocation of oil revenues to the broad domestic economy through direct public spending and through the banking sector is a key driver of the favourable conditions that have long supported GCC banks," said JF Tremblay, associate managing director at Moody's and co-author of the report.
The rating agency said so far, liquidity has been tightening due to significantly reduced deposit inflows from government and government related entities. On the asset side, however, risks have so far been limited due to bank lending to the energy related sector remaining relatively low. Energy exposures only constitute up to five per cent of banks' loan books across the GCC.
"As low oil prices persist, however, oil-related government revenues will continue to decline and, in the absence of some repatriation of foreign capital placed internationally by sovereign wealth funds, liquidity in the banking system could reduce further. Banks are already being pushed to compete more aggressively for deposits in some jurisdictions and to tap the public markets, thereby increasing funding costs and impacting profitability," Moody's analysts said.
The widening gap between low oil prices and high government spending policies could have increasingly negative credit implications for the banks via one or both of the following two channels, Moody's said.
Aside from the UAE, where revenues from oil and gas account for a 63 per cent of total revenues, the share of oil in other GCC economies broadly ranges between 80 per cent and 90 per cent of GDP, creating a very large dependence on a volatile commodity.
"So far, the most visible impact of lower oil prices on GCC banks has been seen on the liability side. Liquidity has been tightening due to significantly reduced deposit inflows from government and government-related entities," the report said.
Moody's warns that a substantive slowdown in public spending would negatively impact loan growth and corporate top-line earnings. Also, loan performance would deteriorate in the face of weakening demand for corporate goods and services, reduced consumer and investor confidence, and possible challenges in the refinancing of maturing corporate debt. "Together, these factors would likely push up loan loss provisioning costs and undermine banks' net profitability."
As such, the average deposit ratings of GCC banks remain high, both on an absolute basis and when compared with those in other systems.
GCC governments have shown a consistent record of intervention over the last few decades to avoid losses to depositors and creditors, which range from direct capital injections to directed mergers and government guarantees. This willingness has been driven by several factors. These include the integrated 'policy' role of banks in economic development; the dominance of domestic banks in public and private-sector finance; the highly concentrated nature of GCC banking systems, where the top four banks in aggregate tend to hold over 50 per cent of deposits; and the sizable government shareholdings in many of the banks.
"The first three factors mean that support thus far has broadly been indiscriminate for all banks across all six systems. Lower government financial reserves, however, could lead to a shift in policy towards more selective support, with the more systemically important and government-owned banks being favoured in the future," the rating agency said.
- issacjohn@khaleejtimes.com