Economic recovery a boon for GCC banks in 2018 and beyond, says BMI

Report says operating conditions will improve with an expected boost in credit demand

Commercial banks in the Arabian Gulf will benefit from the improving macroeconomic environment across the region in 2018 and beyond. Andrew Henderson / The National

Commercial banks in the Arabian Gulf will benefit from the brighter macroeconomic environment this year and beyond as region's businesses resume expansion plans, improving the operating environment and boosting credit demand.

Slowly rising interest rates and funding by the GCC governments will also support deposit growth, ensuring broader stability for the banking sector, BMI Research, a unit of Fitch, said in a report released on Thursday.

“GCC commercial banks will benefit from an improving operating environment in 2018, largely owing to the economic recovery underway across the region,” BMI said. “Rising oil prices will enable governments to move away from austerity, which support consumer and business confidence and have a positive impact on credit demand.”

Banks in the six-member economic bloc of the GCC have struggled to maintain profit growth in the past two years.

The fall in oil prices from the mid-2014 peak of $115 a barrel to below $30 a barrel in 2016 forced the governments to cut spending, which slowed economic growth and crimped credit demand. The sovereigns, which heavily rely on the sale of hydrocarbons for revenue, had withdrawn their bank deposits and turned to domestic borrowings, a move which sparked a liquidity crunch in the wider banking system.

Economic growth is reviving as crude prices rise to nearly $70 a barrel, boosting fiscal revenues for the governments, which have tapped international debt markets through loans and bond sales to finance budget deficits. The region's average weighted real GDP will grow 2.3 per cent in 2018 and 2.7 per cent the following year, after bottoming at an estimated 0.4 per cent in 2017, according to BMI forecasts.

"All the GCC countries look set for an uptick in economic activity in 2018, which we believe will be a boon for the banking sector," BMI research analysts said in the report. Despite tailwinds from the economic recovery , growth in the banking sector will remain "modest compared with the pre-oil slump boom years".

Last year lenders across the region had a mix bag of earnings, with most reporting single digit net profit increases. Abu Dhabi Commercial Bank recorded a 3 per cent growth in 2017 net income to Dh4.27bn, while Mashreq bank in Dubai, one of the oldest lenders in the UAE, reported a 6.5 per cent increase to Dh2.1bn. Both ADCB and Mashreq's net income was below analysts' forecast.

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First Abu Dhabi Bank recorded a 3.5 per cent drop in net profit to Dh10.92 billion on lower revenues and merger costs. National Bank of Kuwait, the largest lender in the nation, said its full year net income climbed 9.2 per cent.

However, the net profit of Dubai Islamic Bank (DIB), the emirate’s largest Sharia-compliant lender, rose 20 per cent in 2017, beating analysts' estimates, and Emirates NBD, Dubai's largest lender, said its net profit for 2017 rose 15 per cent.

Government efforts to support domestic banks and economic stimulus packages are also expected to help increase liquid assets of the lenders, especially in Saudi Arabia, according to Moody’s Investors Service.

Domestic liquid assets of lenders in the kingdom at the end of 2017 stood at a record high 457bn riyals, despite subdued deposit growth and challenging business conditions last year.

“In particular Moody’s expects that Saudi banks will benefit from the government’s private-sector stimulus of 72bn riyals to support private-sector growth over the next four years,” the rating agency said in a note on Thursday.

BMI said that the improving consumer and business confidence will translate into increased demand for credit in 2018 and beyond. Consumer demand for financing will also increase, supportive of loan book growth, which remained subdued in the past two years.

“We also expect [regional] governments’ ambitious economic transformation programmes to be a long-term driver of loan growth, as they put a strong emphasis on supporting the development of non-oil industries and improving the region’s infrastructure networks – a precondition to attract investment and grow these [GCC] countries’ non-oil sectors.”