Oil de­cline to 'ad­versely af­fect' bank­ing sec­tor: S&P

The Pak Banker - - COMPANIES/BOSS -

Af­ter post­ing pos­i­tive re­sults in the past year, Is­lamic banks in the UAE and the rest of the Gulf Co­op­er­a­tion Coun­cil (GCC) re­gion are likely to see prof­its slow­ing down in 2015 as the fall in oil rev­enues threaten the growth of re­gional economies.

Ac­cord­ing to a re­port pub­lished on Wed­nes­day by Stan­dard & Poor's Rat­ing Ser­vices, the "grad­ual weak­en­ing in eco­nomic con­di­tions" will "ad­versely" af­fect the bank­ing in­dus­try in the re­gion. Growth of net in­come and de­posits in Gulf-based Is­lamic banks will slow down, while as­set qual­ity is seen to de­te­ri­o­rate.

Since June last year, global oil prices have been fall­ing and a strong re­cov­ery in the near term seems un­likely. S&P pre­dicts that prices will re­main "rel­a­tively weak through 2016", with Brent crude forecast to av­er­age $55 per bar­rel in 2015, $65 in 2016 and about $75 in 2017.

"Given the im­por­tance of oil-re­lated rev­enues to the re­gion's economies, the en­su­ing grad­ual weak­en­ing in eco­nomic con­di­tions for the sov­er­eign states that make up the [GCC] - Bahrain, Kuwait, Oman, Qatar, Saudi Ara­bia and the UAE - will in our view ad­versely af­fect their bank­ing sec­tors," S&P said in a state­ment.

Sources in the in­dus­try have said that liq­uid­ity con­di­tions in the coun­try are al­ready tight. "There seems to be a wor­ry­ing trend. Gov­ern­ment and public sec­tor de­posits are de­clin­ing. Cer­tifi­cates of de­posits is­sued by [the Cen­tral Bank] to ab­sorb ex­cess liq­uid­ity in the sec­tor have been de­clin­ing as well. All these sig­nal a tight­en­ing liq­uid­ity con­di­tion," Alp Eke, se­nior economist at the Na­tional Bank of Abu Dhabi, told Gulf News. NBAD's June 2015 UAE bank­ing sec­tor over­view noted that the gov­ern­ment and public sec­tor de­posits, Cen­tral Bank for­eign ex­change re­serves, loan to de­posit ra­tios and liq­uid­ity in the bank­ing sys­tem are al­ready show­ing some "less than pos­i­tive signs".

The price of crude con­tin­ued to de­cline on Wed­nes­day as petroleum ex­port­ing coun­tries, which in­clude Saudi Ara­bia, UAE, Qatar and Kuwait, con­tin­ued to pump mil­lions of bar­rels of oil into the mar­ket and China al­lowed its own cur­rency to plum­met for a sec­ond day.

Timucin En­gin, S&P's credit an­a­lyst, said that as a re­sult of the weak­ness in oil prices and its ef­fects on GCC economies, the op­er­at­ing con­di­tions for Is­lamic banks in the re­gion will change grad­u­ally. "Although our credit growth pro­jec­tions re­main largely un­changed for 2015, we be­lieve de­posit growth will slow some­what due to rel­a­tively weaker liq­uid­ity con­di­tions and as­set qual­ity will grad­u­ally de­te­ri­o­rate in line with the eco­nomic slow­down," En­gin said.

"These fac­tors will in our view grad­u­ally in­crease credit losses at Is­lamic banks in 2015, lead­ing to lower net in­come growth than in 2014," added S&P's credit an­a­lyst Suha Ur­gan. "Given that Is­lamic banks gen­er­ally op­er­ate with healthy fund­ing and cap­i­tal po­si­tions, we ex­pect them to adopt a con­ser­va­tive stance in 2015 and main­tain strong lev­els of cap­i­tal while look­ing to fur­ther di­ver­sify their fund­ing base."

S&P, how­ever, noted that de­mand for Shari­a­com­pli­ant prod­ucts and sup­port­ive gov­ern­ment ac­tions will still en­able Is­lamic banks to con­tinue to grow and grad­u­ally in­crease their mar­ket share.

"We ex­pect 2015-2016 to be rel­a­tively less be­nign for Gulf Is­lamic banks in gen­eral, although we still be­lieve the long-term sup­port­ive fac­tors for these banks re­main un­changed." Among the GCC economies, S&P said that the UAE, Qatar and Saudi Ara­bia con­tinue to of­fer the "strong­est growth op­por­tu­ni­ties" in the re­gion.

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