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