|13 March, 2018

Rising interest rates to boost GCC banks' profitability

Moody's sees GCC economic growth remaining modest with ample liquidity but reliance on government funding is on the rise

Commuters walk past a bank sign along a road. Image used for illustrative purpose.

Commuters walk past a bank sign along a road. Image used for illustrative purpose.

REUTERS/Anindito Mukherjee

The projected rise in interest rate rise will boost profitability of the GCC banks this year, analysts said.

"Interest rate hike will make banks more profitable. In a short term, we see it positive for the profitability because most of the countries here have large non-interest bearing deposits which means that impact of cost of funding will be very moderate. Most of the geographies are heavily reliant on deposits rather than market funding as is the case in Northern Europe or the US," Olivier Panis, vice-president and senior analyst for financial institution group at Moody's Investors Service.

"In the medium term, if we see more material increase in interest rates that will have negative impact on NPL (non-performing loan) ratios," he said while speaking to the media in Dubai on Tuesday.


Analysts expect that the US Federal Reserve could increase interest rates by 3-4 times this year by 25 basis points each time.

Panis pointed out that most of the companies have seen their profits decrease because the cost of borrowing has increased.

In the UAE, he said there is a fierce competition and more banks tend to focus on retail and blue-chip companies rather than the small and medium enterprises.

He expects NPLs to increase in Saudi Arabia this year. Moody's expects NPLs will remain low, averaging 3-4 per cent in 2018. It expects slight rise in NPLs due to higher levels of renegotiated or past due loans in some systems. The global ratings agency said modest economic conditions, higher borrowing costs, rising taxes and subsidy cuts will add pressure on the regional banking industry. Provisions will continue to rise to 20 to 30 per cent of pre-provision income, it added.

Moody's analysts expect lending growth to pick upto four per cent in 2018 and accelerate further next year after one per cent contraction in 2017 due to lower credit demand. Moody's sees GCC economic growth will remain modest with ample liquidity but reliance on government funding is on the rise.

Commenting on the Islamic finance, Nitish Bhojnagarwala, vice president - senior analyst, Moody's, said sukuk issuances will largely be flat after a record year in 2017 when they grew 17 per cent to reach $100 billion, driven largely by GCC sovereigns.

"We expect similar issuance in 2018, although the recent oil price recovery could lower financing needs for some sovereigns," he said, adding that the market attracted gross premium contributions of $14.9 billion in 2015 and he expects it attracted over $20 billion in 2017.

"We expect this growth momentum to continue in 2018 and over the medium term, spurred by strong growth prospects in Southeast Asia and North Africa," he said. 

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