MANAMA: Banks in the Gulf Cooperation Council countries, will remain under pressure for the remainder of 2016 and 2017, according to S&P Global Ratings.
The operating environments in these emerging banking markets are suffering the effects of low commodity prices on economic growth and investment activity, still significant political and geopolitical risks, and weakening local currencies outside the Gulf Cooperation Council (GCC). Positively, over the past few months, we have seen a slow return of foreign investors to some of these markets because interest rates remain low or negative in developing markets and investors are actively hunting for higher yield.
Slow economic growth means fewer growth opportunities for banks in the GCC. We expect loan growth in the region will reach around 6% on average in 2016 compared with around 10% in 2015. We think this slowdown will persist in 2017, with growth stabilizing at around 5%. Lower oil prices mean lower liquidity, as deposits from governments and their related entities account for between 20% and 40% of the deposit base of GCC banks, and this inflow of money depends heavily on oil prices. With the decline in liquidity, the cost of funding for banks has increased. In the same vein, the drop in economic growth has exposed the most vulnerable borrowers, primarily subcontractors and small and midsize enterprises, leading to higher default rates and provisioning needs.
“Overall, we think that not only will banks’ loan growth decline, but profitability will also drop, prompting some banks to take a closer look at their efficiency and potentially triggering mergers or acquisitions. The trend started in June 2016, with the announced merger between two banks in Abu Dhabi, First Gulf Bank and National Bank of Abu Dhabi, to create one of the largest banks in the region. On a positive note, we think that the deterioration will be largely controlled and that banks have the capacity to absorb the negative impacts thanks to their strong asset quality, good profitability, and strong capitalization. We also expect the pressure on banks’ liquidity in the GCC to ease, owing to lower loan growth and governments tapping foreign capital markets or their own reserves to inject liquidity locally.
“We think that two important factors could influence the overall performance of banks in countries in our study. On the downside would be an unexpected additional drop in commodities prices or materialization of idiosyncratic risks such as political risks or lack of economic reforms. On the upside, however, a continuation of the recovery in capital inflows that we’ve observed over the past few months could ease the liquidity pressure in some of these markets.”
Overall, S&P expects the trend of deteriorating financial performance to continue, as demonstrated by the negative outlook or CreditWatch negative (negative bias) on our bank ratings in these countries. Overall, 65% of the outlooks/CreditWatches on bank ratings in these countries were negative as of Sept. 15, 2016. We see Nigerian and small Russian banks as being the most vulnerable to default risk among our group, while Gulf Cooperation Council (GCC) banks and South African banks are less vulnerable, in our opinion.