Pro­longed low oil prices hurt­ing GCC banks re­silience: Moody’s

The Pak Banker - - FRONT PAGE -

A con­tin­ued de­cline in oil prices and ex­pec­ta­tions of a pro­longed pe­riod of low prices are ex­pected to ad­versely im­pact the per­for­mance and credit rat­ings of GCC banks, ac­cord­ing to rat­ing agency Moody's.

Moody's re­cently re­vised its Brent crude price ex­pec­ta­tion to $33 and $38 (Dh121.10 and Dh139.57) per bar­rel for 2016 and 2017 re­spec­tively, sig­nalling grow­ing chal­lenges to the re­silience of re­gional banks.

"De­spite low oil prices and a high de­pen­dency on oil rev­enues across the GCC coun­tries, bank rat­ings in the re­gion con­tinue to ben­e­fit from their gov­ern­ments' will­ing­ness to tap ac­cu­mu­lated wealth to sup­port coun­ter­cycli­cal spend­ing," ac­cord­ing to Khalid Howladar, a se­nior credit of­fi­cer at Moody's. "How­ever, con­tin­ued oil price de­clines sig­nal in­creas­ing chal­lenges to the sus­tain­abil­ity of this dy­namic." This could oc­cur both di­rectly and in­di­rectly.

The di­rect im­pact is likely to come from sce­nar­ios where gov­ern­ments con­tinue to in­cur large deficits to the point of af­fect­ing their credit pro­files, and/or some of them sig­nal a shift in pol­icy that would point to a less sup­port­ive stance to­wards banks in or­der to pro­tect their own bal­ance sheets, the sup­port lev­els will de­cline.

The in­di­rect im­pact is ex­pected man­i­fest through a weak­en­ing of the banks' op­er­at­ing con­di­tions, should some of th­ese gov­ern­ments choose to fur­ther re­duce de­posit in­flows to the banks and/or re­duce pub­lic spend­ing and hence their over­all sup­port of their do­mes­tic economies.

Moody's said its bank de­posit rat­ings in GCC coun­tries in­cor­po­rate an av­er­age up­lift of four notches from their stand-alone credit pro­files, re­flect­ing their as­sess­ment of the high like­li­hood of govern­ment sup­port in the event of dis­tress. Thus any any change in the agency's as­sump­tions of govern­ment sup­port for banks could ad­versely im­pact rat­ings.

Within the Gulf Co­op­er­a­tion Coun­cil (GCC), the credit pro­files of lenders in Bahrain and Oman are al­ready un­der pres­sure, pri­mar­ily be­cause of their weaker lo­cal economies and the more lim­ited re­sources of their do­mes­tic gov­ern­ments. "Re­al­lo­ca­tion of oil rev­enues to the broad do­mes­tic econ­omy through di­rect pub­lic spend­ing and through the bank­ing sec­tor is a key driver of the favourable con­di­tions that have long sup­ported GCC banks," said Jean-Fran­cois Trem­blay, as­so­ciate man­ag­ing di­rec­tor at Moody's.

Apart from the UAE, where rev­enues from oil and gas ac­count for a size­able 63 per cent of to­tal rev­enues, the share of oil in other GCC economies broadly ranges be­tween 80 per cent and 90 per cent of GDP, cre­at­ing a very large de­pen­dence on a volatile com­mod­ity.

So far, the most vis­i­ble im­pact of lower oil prices on GCC banks has been seen on the li­a­bil­ity side. Liq­uid­ity has been tight­en­ing due to sig­nif­i­cantly re­duced de­posit in­flows from govern­ment and govern­ment-re­lated en­ti­ties.

Desta­bil­is­ing out­flows have been avoided, how­ever, partly be­cause GCC gov­ern­ments have re­lied on bor­row­ing in­stead of sig­nif­i­cantly de­plet­ing their cash bal­ances held in the bank­ing sys­tem.

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