Regional banks face challenges in 2019
Analysts at Moody's believe that the outlook for banks in the UAE, Kuwait and Saudi Arabia remained resilient. - File photo
Dubai - Banks in the Middle East, North Africa, and Turkey region are likely to face more headwinds in 2019
Published: Thu 24 Jan 2019, 8:20 PM
Last updated: Sun 3 Feb 2019, 10:16 AM
Banks in the Middle East, North Africa, and Turkey region are likely to face more headwinds in 2019 due to tighter global liquidity conditions and a stronger US dollar that makes lending more expensive, financial analysts said.
Geopolitical as well as local instability will add to the woes of the lenders in the region, S&P Global Ratings said on Wednesday.
The region's prospects for economic growth will be dampened, notably by Turkey's expected contraction, said S&P's report, "Banks In Emerging Markets: The Overcast 2019 Outlook For Banks In The Middle East, North Africa, And Turkey."
Analysts at Moody's, however, believe that the outlook for banks in Kuwait, the UAE, Qatar and Saudi Arabia remained resilient, while fiscal pressures will weigh on banks in Oman and Bahrain, where oil prices will continue to remain below the fiscal break even level.
"Current oil prices will support increased government spending, and stimulus packages such as UAE's Expo 2020, the Saudi National Transformation Plan and Qatar FIFA 2022, will underpin banks' stable financial performance," Moody's analysts said.
They also believe that recent merger and acquisition drive among GCC banks, driven by slow growth and subdued credit demand in the region, also would help the sector by easing overcapacity and boosting.
Analysts at S&P expect a drop of 0.5 per cent in real GDP growth for Turkey in 2019. Much of the lira's depreciation has passed through into higher inflation. A 26 per cent minimum wage hike scheduled for this year is likely to push prices up further, cutting into consumers' already weakened purchasing power.
"On a positive note, lower commodity prices could provide some breathing space, as most of these countries are commodities importers. We expect oil prices to stabilise around $55 in 2019-2020," S&P analysts said. They expect nominal loan growth in 2019 to stabilise around 7-8 per cent on average, ranging from zero per cent for Turkey to 17 per cent for Egypt. However, we consider these figures, if adjusted for inflation, as insufficient to cope with the region's economic development needs in the Middle East, North Africa, and Turkey (Menat).
Several economies in the region, and in particular Jordan and Lebanon, are facing an overall stagnation in lending activities. "Tunisia is also another country where we continue to view asset quality negatively. While banks' reported nonperforming loans dropped slightly in the past two years, we think asset quality indicators could be worse if banks were to adopt International Financial Reporting Standards 9 (IFRS 9)," S&P analysts said.
For Menat banks high dependence on foreign funding remains one of the most prominent risks. "While some still rely on non resident transfers (Morocco, Lebanon, Jordan, and Egypt), which we expect to continue growing, others are more dependent on volatile wholesale external funding (Turkey). We expect return on assets to decline slightly for Menat banks in 2019, to an average of about 1.2 per cent."