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GCC Islamic banks stay on course through glum operating conditions

A broker monitors stock prices on a screen at the Saudi Investment Bank in Riyadh September 5, 2013. REUTERS/Faisal Al Nasser

A broker monitors stock prices on a screen at the Saudi Investment Bank in Riyadh September 5, 2013. REUTERS/Faisal Al Nasser

Reuters/Faisal Al Nasser

21 April 2017
Muscat: A weak economic environment will continue to dampen the financial performance of Islamic banks in Gulf Cooperation Council (GCC) countries in 2017 and 2018, according to S&P Global Ratings.

The end of the commodities super-cycle has sparked a fall in the economic growth and prospects of the GCC region, implying both lower growth opportunities and deteriorating liquidity for its conventional and Islamic banking systems. 

S&P foresees further declines in GCC banks' asset quality and profitability indicators in 2017-2018. “We think that the banks have built sufficient buffers to make an overall impact on their financial profiles manageable,” it said.

By global and regional standards, the Islamic banks in the S&P sample continued to display strong asset quality indicators, profitability, and capitalisation in 2016. S&P thinks that the current environment is creating an opportunity for local regulators to start inching closer to a more stringent application of Islamic finance's profit and loss sharing principle.

The rating agency has seen a few attempts in the industry to move in this direction, through the issuance of Tier 1 and Tier 2 sukuk with loss absorption to the point of non-viability (generally defined as a breach of the local regulatory capital ratios). S&P expects such issuance will continue, albeit slowly, over the next two years.

The drop in the oil price since the second half of 2014 had put the brakes on GCC economies and squeezed growth opportunities for their banking systems. S&P Global Ratings forecasts oil prices will stabilise at $50 per barrel in 2017 and 2018, with unweighted average GDP growth in the six GCC countries pegged at 1.9 per cent in 2017 and 2.4 per cent in 2018, after 2.3 per cent in 2016.

S&P consequently expects that the slowdown in growth at both conventional and Islamic banks in the region will persist. Asset growth stabilised at 6.4 per cent in 2016 for Islamic and conventional banks in our sample, compared with 6.6 per cent and 6.9 per cent, respectively.

In S&P’s base-case scenario, it assumes that asset growth will drop to about 5 per cent as governments' spending cuts and revenue-boosting initiatives, such as tax introductions, will reduce opportunities in the corporate and retail sectors.

The agency sees banks becoming more cautious and selective in chasing high-quality lending opportunities, triggering stiffer competition.

The story is not the same for all GCC countries, however. Although the economic slowdown was and will remain more pronounced in Saudi Arabia, Islamic banks' growth accelerated there in 2016, thanks to their strategy of increasing their foray into the corporate and small and mid-size (SME) sectors. By contrast, the slowdown was deeper in Qatar, where a mix of lower liquidity and government spending cuts prompted banks to curtail their pace of expansion.

Asset growth was about nil in Kuwait over the past year, hit by the depreciation of some foreign currencies and the ensuing impact on the financials of some leading Kuwaiti Islamic banks. Lastly, despite the tepid economy and a drop in real estate prices in the United Arab Emirates, Islamic banks continued to expand by high single-digit figures.

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© Times of Oman 2017
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