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Sunday, Jul 17, 2016
Dubai: A mix of higher cost of funding resulting from worsening deposit and liability mix, increased cost of liquidity along with worsening asset quality and a slowdown in asset growth is expected to limit the second quarter earnings of most Gulf banks.
Banks are facing substantial increase in the costs of the liquidity, coupled with a worsening deposit and funding mix, with banks and governments having to source funding outside their home markets at wider spreads. Analysts expect lower earnings for most GCC markets in the second quarter with Kuwait showing the best resilience.
Although a number of banks in the region have initiated cost reduction measures, analysts say the impact of rising cost of funding, slowing loan growth and rising non-performing loans (NPLs) can’t be fully addressed through operating expense (OpEx) optimisation alone.
“Banks can only reduce their OpEx to shield themselves partially from the headwinds. For the second quarter we still expect OpEx growth of between 2- 4.6 per cent year on year, translating into slight negative JAWs [ ratio of income growth rate to expense growth rate] on a year on year basis,” said Jaap Meijer, head of Research at Arqaam Capital.
Analysts said due to generally low cost to income ratio, further expected cost optimisation in the second half of the year and in 2017 can hardly offset the pressure building up on GCC banks’ profit and loss accounts leaving many of them exposed to potential earnings decline.
In this difficult economic environment banks that have access to liquidity, strong risk adjusted return are expected generate profits for shareholders. Analyst say, more than ever banks will need to focus on the ratio of risk adjusted return to economic capital (RAROC).
“Winners in the region have generally strong returns, solid lending standards with low risk models, liquid balance sheets, access to stable deposits and wholesale debt, and a flexible cost base, allowing the banks to continue generating economic profits for shareholders,” said Meijer.
Cheap funding
Not only do lower cost of funding translate into better net interest margins (NIMs), it allows banks to be more price competitive in loan pricing. Banks can also afford to have better lending standards, shying away from higher risk segments if this is not offset by adequate loan spreads.
Low funding costs correlate strongly with i) a low dependency on wholesale funding (wholesale funding is more expensive than even the most expensive deposits) and ii) a high share of low cost current account and savings accounts Price competition for time deposits has increased, especially for corporate accounts, reaching 2.5-3 per cent. Naturally, the value of deposit franchises are on the rise, with tightening in liquidity in GCC markets.
By Babu Das Augustine Banking Editor Gulf News 2016. All rights reserved.
Dubai: A mix of higher cost of funding resulting from worsening deposit and liability mix, increased cost of liquidity along with worsening asset quality and a slowdown in asset growth is expected to limit the second quarter earnings of most Gulf banks.
Banks are facing substantial increase in the costs of the liquidity, coupled with a worsening deposit and funding mix, with banks and governments having to source funding outside their home markets at wider spreads. Analysts expect lower earnings for most GCC markets in the second quarter with Kuwait showing the best resilience.
Although a number of banks in the region have initiated cost reduction measures, analysts say the impact of rising cost of funding, slowing loan growth and rising non-performing loans (NPLs) can’t be fully addressed through operating expense (OpEx) optimisation alone.
“Banks can only reduce their OpEx to shield themselves partially from the headwinds. For the second quarter we still expect OpEx growth of between 2- 4.6 per cent year on year, translating into slight negative JAWs [ ratio of income growth rate to expense growth rate] on a year on year basis,” said Jaap Meijer, head of Research at Arqaam Capital.
Analysts said due to generally low cost to income ratio, further expected cost optimisation in the second half of the year and in 2017 can hardly offset the pressure building up on GCC banks’ profit and loss accounts leaving many of them exposed to potential earnings decline.
In this difficult economic environment banks that have access to liquidity, strong risk adjusted return are expected generate profits for shareholders. Analyst say, more than ever banks will need to focus on the ratio of risk adjusted return to economic capital (RAROC).
“Winners in the region have generally strong returns, solid lending standards with low risk models, liquid balance sheets, access to stable deposits and wholesale debt, and a flexible cost base, allowing the banks to continue generating economic profits for shareholders,” said Meijer.
Cheap funding
Not only do lower cost of funding translate into better net interest margins (NIMs), it allows banks to be more price competitive in loan pricing. Banks can also afford to have better lending standards, shying away from higher risk segments if this is not offset by adequate loan spreads.
Low funding costs correlate strongly with i) a low dependency on wholesale funding (wholesale funding is more expensive than even the most expensive deposits) and ii) a high share of low cost current account and savings accounts Price competition for time deposits has increased, especially for corporate accounts, reaching 2.5-3 per cent. Naturally, the value of deposit franchises are on the rise, with tightening in liquidity in GCC markets.
By Babu Das Augustine Banking Editor Gulf News 2016. All rights reserved.
