Paris: The significant drop in oil prices could lead to higher credit losses and lower liquidity for some banking systems in oil-producing countries, according to Standard & Poor’s Ratings Services.
“Although we do not expect the drop in oil prices to have any major negative implications on these countries’ banking systems, we think banks in Nigeria, Bahrain, Oman, and Brunei are more vulnerable than the rest,” it added.
“The banking systems of countries with low fiscal buffers, significant economic imbalances, and high dependence on oil-related bank deposits may come under pressure.
“We expect the oil price decline to affect some banking systems in oil-exporting countries either directly due to high exposure and deposits from oil- or government-related companies, or indirectly through lower investments and economic growth, which may weigh on banks’ asset quality and profitability indicators,” it added.
“While our base-case scenario assumes this drop will not significantly affect the performance of oil-exporting countries’ banking systems, the systems of countries with low fiscal buffers, significant economic imbalances, and high dependence on oil-related bank deposits may come under pressure,” Standard & Poor’s credit analyst Mohamed Damak, said.
“Banks in Bahrain and Oman are vulnerable indirectly through the potential drop in investments and economic growth, and Nigeria is vulnerable directly through its banking system’s significant overall exposure to the oil sector,” S&P in its new report titled “how will lower oil prices affect banks in 10-oil exporting countries, said.
“Brunei is exposed to both channels, owing to the significant contribution of the oil and gas sectors to its economy and its high direct exposure through contractors, suppliers, and oil and gas companies’ employees and civil servants.”
Following the significant drop in oil prices over the past few months, reaching around $55 per barrel (/bbl) for Brent crude as of mid-February compared with more than $100/bbl a year ago, Standard & Poor’s Ratings Services has revised its price assumptions. We now expect Brent’s price to stabilize around $55/bbl in 2015 and increase slightly to around $65/bbl in 2016.
“In light of this decline, the report looks at the banking systems in 10 oil-exporting countries—the six Gulf Cooperation Council countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates), plus Brunei, Kazakhstan, Malaysia, and Nigeria. We selected these countries based on the oil sector’s significant contribution to their exports, economies, and government budgets.
“Oil’s price decline could affect these countries’ banking systems either directly through banks’ exposure to and deposits from oil- or government-related companies or indirectly through lower investments and economic growth, which may weigh on banks’ asset quality and profitability indicators.”