Banks in Oman and Kuwait stand to benefit from higher oil prices, which will propel private sector credit growth and offset lower government borrowing as fiscal deficits narrow thanks to a recovery in the energy market.
“We believe that asset growth at Kuwaiti commercial banks will continue to gather momentum, owing to rising oil prices and production - a trend we have already seen playing out in 2017 after the sector bottomed in 2016,” BMI Research said in a report. “Higher oil prices will lead to increased liquidity in the system, which bodes well for deposit growth, assisted by rising interest rates to encourage saving.”
Brent oil prices, which are hovering around a three-year high of US$70 a barrel, are helping fuel an upbeat outlook for banks, boosting their liquidity while they also benefit from higher interest rates. Monetary policy of Arabian Gulf countries is closely aligned to US Fed policy as their currencies are pegged to the dollar, except for Kuwait which links its dinar to a basket of currencies dominated by the greenback.
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The collapse of oil prices dented the performance of Gulf banks over the past three years, as the slump sucked liquidity and governments tapped deposits to plug fiscal deficits caused by the shortfall in revenue. Bank profits were squeezed as lending dipped with lenders becoming more cautious in offering loans, particularly to small and medium sized enterprises.
“An expected pick-up in private sector credit [in Kuwait] will more than offset lower government borrowing requirements as higher oil prices result in lower fiscal deficits,” said BMI.
Asset growth in Kuwait will accelerate to 6 per cent in 2018, up from a projected 5 per cent in 2017, which will be driven by private sector credit growth projected to expand 6 per cent in 2018 from 4 per cent in 2017. Deposits are projected to grow 5 per cent in 2018, up from 2 per cent in 2017.
In Oman, asset growth is forecast at 5 per cent in 2018 up from 3 per cent in 2017, while growth in private sector credit lending will reach 7 per cent in 2018 up from 5 per cent in 2017. Deposit growth will reach 6 per cent in 2018, up from 3 per cent in 2017.
Oman’s banking sector, however, is more vulnerable than that of Kuwait, and faces a number of risks, according to BMI.
“Despite this brighter outlook for 2018, we do note several headwinds and risks that will keep the sector's growth [in Oman] below its historic long-term average,” said BMI. “These include competition from rapidly growing Islamic finance institutions, lower oil prices than in the pre-2014 period, and a reliance on external funding.”
While oil prices are at a three-month high, they are unlikely to rise back to the $100-a-barrel level of 2014, keeping Omani government finances under strain and curtailing the government’s ability to help the sector in the event of a shock.
The fledgling Islamic banking industry is also fast competing with the conventional sector since its introduction in 2011, with deposits at Sharia-compliant lenders now comprising 11 per cent of the total.
Oman also suffers from a high loan-to-deposit ratio of 1.09, which shows that lenders rely to a large extent on non-deposit external financing.
