High oil prices to spur bank lending
dubai — Banks in the GCC will continue to breathe a little easier in the year ahead on the back of strong lending growth and stable profitability, barring any unexpected geopolitical or oil-price shock, according to forecast made by a ratings agency.
Lending growth of GCC banks would stabilise at around the five per cent mark over the next 12 months, “as higher oil prices and stronger public investments raise economic growth in the region overall,” S&P said in its latest report.
Supported by strategic government initiatives, the lending growth will be driven by higher government spending, it said.
“Nevertheless, a surge in geopolitical risk or a significant drop in oil prices, and ensuing delays of some of these initiatives and in overall consumer confidence, could severely affect our base-case scenario,” S&P analysts said in their Global Ratings report.
With return on assets at about 1.5-1.7 per cent and net interest margins at three per cent on average in 2018, the profitability of the banks will stabilise as lenders will benefit from the higher interest rates and significant non-interestbearing deposits on balance sheets. This follows three years of significant pressure,” analysts said.
In the first half, the UAE banking sector continued to surpass GCC peers in terms of total assets that had surged 2 per cent to Dh2.7 trillion. According to the Central Bank of the UAE, the country’s banking sector remained well capitalised, with solid liquidity buffers, stable funding and improved profitability.
Moody’s analysts expect the UAE’s banking sector to remain largely resilient to oil price volatility and its impact on government finances and economic growth. The 10 largest listed banks in the UAE maintained increasing levels of confidence in the second quarter by recording increased lending activity and a higher return on credit, according to data compiled by Alvarez & Marsa. “International operations of GCC banks could pose a latent risk for some GCC banks. A few banks with exposure to Turkey will see some impact on their asset quality,” said the report.
The report noted that with the transition to IFRS 9, GCC banks have now recognised most of the impact of the softer economic cycle on their asset quality. “We therefore believe that the amount of problematic assets, which we define as IFRS 9 Stage 2 and 3 loans, will likely remain stable, but do not exclude transition between the two categories.” S&P said analysts expect GCC economies to show stronger average economic growth in 2019 of about 2.8 per cent. “However, this growth will still be below the triple-digit oil-price era growth of 2011-2013. We therefore expect lending growth to remain at around the mid-single digits. At the same time, we think that cost of risk will stabilise at around 1.0 per cent-1.5 per cent of total loans,” S&P analysts said.
They noted that the buffer of provisions that GCC banks accumulated over the past years is now stronger as a result of IFRS 9.
The new reporting standard, adopted from the start of this year, required banks to set aside provisions in advance, based on their loss expectations. “Finally, we think that GCC banks’ profitability will stabilize. It will benefit from the higher interest rates and the significant amount of non-interestbearing deposits sitting on banks’ balance sheets,” said S&P.
The report noted that overall, 25 per cent of S&P rated banks in the GCC currently have a negative outlook, two-thirds of which are in Qatar, due to the potential effect of the boycott on Qatari banks’ funding profiles, asset quality, and profitability. There are also a couple of other banks elsewhere in the GCC, where higher risks from their international operations drive our negative outlook. The average GCC bank rating is ‘BBB+’.
Higher oil prices and stronger public investments are resulting in higher economic growth across the GCC in 2018. “We forecast that oil prices will stabilise at about $65 per barrel in 2019 and $60 in 2020, and we anticipate unweighted average economic growth of 2.8 per cent in 2019-2020 for the GCC countries,” said S&P.
The 10 largest listed banks in the UAE maintained increasing levels of confidence in the second quarter by recording increased lending activity