Sunday, May 10, 2015

Dubai: The impact of a sharp decline in oil prices on the GCC economies are slowly filtering down to the banking sector in the form slower deposits and loan growth as decline in asset prices are making banks more cautious while loan demand itself is seen cooling.

“Equity prices have declined, and volatility has risen. Real estate markets are showing signs of cooling. Liquidity could tighten as oil-related bank deposits decline, and non-performing loans could (NPLs) could rise,” the International Monetary Fund (IMF) said in its latest regional economic outlook.

But the IMF said GCC banks do not face any systemic weakness. “Bank are expected to remain sound despite the sharp decline in oil prices and slowing loan growth, because they have strong initial financial positions and support from continuing government infrastructure investment,” said Masoud Ahmad, regional director for Middle East of the IMF.

Analysts say there is a qualitative shift in the bank loan market as banks are becoming more cautious and selective. In the initial phase, the loan growth slowdown will be more pronounced in the small and medium enterprises (SME) segment, and if the oil decline persists over a longer period, the squeeze is expected to extend to both loan demand and supply across all segments.

Big corporates and projects continue to receive bank funding at cheap rates, although bankers say the margin squeeze that was widely prevalent in this segment is easing and banks now are able to command better price. “Market dynamics are changing. Heightened competition and ample liquidity in the system had driven down the pricing badly hurting the margins on corporate lending. But the situation is changing and banks are becoming more selective,” said the CEO of a UAE based bank.

The first quarter Credit Sentiment Survey by the Central Bank of UAE showed that the demand for credit in the UAE remains healthy while the credit conditions have softened with moderating demand growth for credit and a tightening of credit standards for corporates.

“Such softening in the March quarter likely reflects conditions reverting towards a more sustainable path following the exceptionally strong conditions evident in early to mid-2014,” the central bank said.

All sectors

Results from the March quarter survey suggest demand growth for business loans persisted through early 2015. However, results also indicated further softening in growth evident in late 2014. The net balance measure for business lending — the weighted percentage of respondents reporting an increase in demand for loans minus those reporting a fall in demand — dropped to 13.6 in the first quarter from 29.6 in the previous quarter.

With the exception of non-bank financial institutions, demand growth for loans slowed across all sectors of economic activity through the March 2015 quarter. Notably, demand growth within sectors which had previously been key drivers of loan demand had slowed markedly. In particular, growth in loans in the construction, property development and the transport sectors had slowed significantly. Retail and wholesale trade and manufacturing, while slowing, continued to report robust demand growth for business loans.

The reasons for slowing demand and supply in the bank loan market could be found in slowing project awards across some of the key markets such as the UAE, Saudi Arabia and Oman.

The value of projects awarded across the GCC increased 9.9 per cent quarter on quarter in the first three months of 2015 with the growth coming mostly from Qatar and Kuwait, according to data published by Abu Dhabi Commercial Bank (ADCB). All other GCC countries saw quarterly falls in the value of projects awarded, with Oman (-43.3 per cent) and the UAE (-35.6 per cent) seeing the largest drops, to below their two-year averages in both cases. The impact of the lower oil price was also seen, with a number of projects placed on hold or cancelled, including chemical (Qatar) and hydrocarbon (Saudi Arabia) projects.

By Babu Das Augustine Banking Editor

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