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