Sunday, May 01, 2016
Dubai: The banking systems of the GCC countries are well positioned to cope with government revenue short falls arising from low oil prices and decline in economic growth, according to Institute of International Finance (IIF), a global association of more than 500 leading financial institutions.
Despite the underlying strength of bank balance sheets in the region, the IIF expects prolonged low oil prices to weaken asset quality and profitability. Financing costs are expected to rise with shrinking liquidity and further hikes in the US interest rates in the second half of this year.
Economic activity and financial developments in the Gulf oil exporters are interlinked with oil price developments. Given this linkage, low oil prices are likely to result in deterioration in the asset quality and liquidity of banks, and financial sector stress issues may emerge. However these are unlikely to cause any systemic risks to banking sectors in the GCC.
“GCC banks have enhanced their risk management and implemented countercyclical capital buffers and loan loss provisions in the past decade to limit systemic financial sector risks. The balance sheets of banks in the region have also benefited from the strong economic performance in the past decade and high government participation in banks,” said Garbis Iradian, chief economist, Middle East and North Africa (Mena) at the IIF.
Decline in oil prices
Across the GCC, capital adequacy ratios of banks exceed 15 per cent last year and Tier 1 capital represent more than 80 per cent of total capital on average. The ratios of banks’ provisions to potential losses associated with non-performing loans (NPLs) are high.
The IMF’s Regional Economic Outlook Update for the Middle East and Central Asia, released last week projects GDP growth of 1.8 per cent for the Gulf oil exporters. Growth in most exporting countries is projected to slow further this year as they tighten public spending in response to lower oil prices. The oil-exporting countries enjoyed large fiscal and external surpluses and rapid economic growth in recent years because of booming oil prices. Since mid-2014, however, the persistent decline in oil prices has turned surpluses into deficits.
“Lower spending by the government and decline in government surpluses are adversely impacting both lending and deposits. While liquidity is shrinking, loan growth and asset quality are likely to decline in the short to medium term. But with strong capital positions supported by robust regulatory regimes are expected to keep banking systems healthy,” said Masood Ahmad, director of the IMF’s Middle East and central Asia department.
While some banks in the region, particularly in the UAE and Qatar, are still overexposed to government-related entities (GREs), this is unlikely to pose material risks to the banks, according to the IIF. Several major banks from the region including National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB) are looking to Asian and African markets with lower banking penetration to find growth.
Liquidity conditions have tightened given strong headwinds to economic activity from lower oil prices and declining government deposits. Banks’ profitability and NPLs are likely to deteriorate. Governments in the region have substantial stakes in the banking systems through which oil-related deposits in many cases are channelled. However, the GCC is also facing increasing pressures, although the impact on bank asset quality has so far been moderate. Spillovers to the financial sector are likely to weigh on credit supply with detrimental effects on prospects for growth.
According to the IIF’s recent Emerging Markets Bank Lending Conditions Survey bank lending conditions in the region have deteriorated. In particular, funding conditions deteriorated significantly. Moreover, loan demand contracted across all loan categories, with the indices for corporate and commercial real estate loans reaching series lows.
By Babu Das Augustine Banking Editor
Gulf News 2016. All rights reserved.