Weak economic environment to hurt GCC banks: S&P

Manama: The conventional and Islamic banks in the Gulf Cooperation Council (GCC) countries will experience a more pronounced slowdown in 2016 and 2017 hurt by weak economic environment, according to S&P Global Ratings.

In a report released yesterday, the agency detailed how ‘Weak Operating Environment Will Weigh On Gulf Cooperation Council Islamic Banks’ Financial Performance’

According to the report, growth in customer deposits for the Islamic banks slowed to 9.2 per cent in 2015 compared with 16.9pc on average in 2014. The report also expects this trend to continue in 2016 and 2017, as governments and their related entities, whose deposits depend on oil prices, contribute between 15pc and 40pc of the total deposits of GCC banks.  

Asset growth for Islamic lenders fell to 7.0 per cent in 2015, compared to 12.3 per cent in the previous year, while it was 5.7 per cent for conventional banks, down from 9.6 per cent in 2014.

“In our base-case scenario, we assume that growth will drop to around 5pc for both types of banks in 2016 as governments strive to restore their fiscal sustainability through a mix of spending cuts and revenue-boosting initiatives,” the report said. The oil price has dropped by more than 70pc since mid-2014.

“Growth opportunities are becoming scarcer as governments cut their expenses to cope with the new oil price reality. We also think that banks will become selective and prioritize quality and risk profile over quantity and profitability.”

“Cost of funding will increase due to lower liquidity, a direct consequence of the fall in oil prices. We foresee an increase in credit losses due to the less supportive economic environment. Exposure to subcontractors, SMEs, and some private sector retail will lead the trend. We therefore expect the revenue growth for the banks to decelerate and we expect the banks to focus on their cost base (optimization of branches, etc.) to mitigate the impact,” the report added.

The agency also warns that the economic slowdown will be more pronounced in Saudi Arabia and the United Arab Emirates (UAE).

“In Saudi Arabia, we expect that the government will cut spending by close to 15pc, attempting to offset a decline in government revenues of a similar magnitude. We think that the Saudi government will still maintain spending on strategic infrastructure projects, however, resulting in some growth opportunities for the financial sector. In the UAE, we see the current trend in the real estate sector resulting in fewer growth opportunities for Islamic banks, although investments related to Dubai Expo should help create some opportunities,” the report explained.

The report also points out that Qatar and Kuwait appear to be less affected. Qatar will be buoyed by the preparation of the World Cup 2020, while the government