GCC bank income growth to slow, S&P says

Income growth in the Arabian Gulf’s banking sector will slow this year and possibly decelerate further next year because of the impact of lower oil prices, Standard & Poor’s said .

Net income growth for the 26 Arabian Gulf banks that S&P rates slid to 4 per cent year-on-year in the second quarter, compared with 7 per cent in the first quarter and more than 10 per cent in the previous three quarters.

“In line with our expectations, banks seem to have adopted a more conservative stance in terms of asset growth, given the drop in oil prices and its effects on the region’s economic outlook,” said the S&P credit analyst Suha Urgan in the report.

In Qatar, asset growth was impacted by deleveraging of government related entities (GREs), tighter mortgage regulation in Saudi Arabia and a slide in real estate deals in the UAE.

The international benchmark Brent dropped more than 40 per cent in the 12 months to June because of an oil supply glut and weaker demand in Europe and Asia.

Gulf banks rated by S&P had posted “a good set of earnings” in the first half of this year thanks to lower credit losses, a trend that is unlikely to continue.

“Over the past few years, GCC banks’ declining credit losses were a key driver of earnings growth and resilience in return on average assets,” said Ms Urgan. “But after five years of decline, credit losses are set to rise for Gulf banks as they cope with slowing growth and capital market volatility.”

The IMF in May lowered its growth forecast for this year for the Gulf to 3.4 per cent, one percentage point lower than its forecast in October last year, because of slower non-oil growth resulting from lower oil prices.

“The decline in net income for Gulf banks results from slower economic growth and tighter liquidity,” said John Sfakianakis, the Middle East director for the investment manager Ashmore Group. “The region has been slowing down and that is impacting banks this year and next year.”

S&P said both the banks’ interest and non-interest income is being impacted.

Ten of the 26 rated banks recorded a year-on-year contraction in non-interest income in the first half of this year.

“Simply put, the squeeze on interest margins has not yet eased,” said the S&P analyst Timucin Engin. “Low interest rates are returning less on bank assets, but funding costs are gradually increasing.”

Net interest income could rise when the US Federal Reserve decides to hike up rates, Mr Sfakianakis said.

“Net interest income is impacted more this year, but as rates begin to rise in 2016 net interest income will be less impacted,” said Mr Sfakianakis. “Going forward non-interest income will be impacted more.”

With regards to customer deposits, the S&P rated Gulf banks posted a 6 per cent increase in customer deposits year-on-year in the first and second quarters of this year, compared with more than 10 per cent year-on-year in all of the past eight quarters. In the UAE, there was a steeper decline in customer deposits because of the drawdown of deposits from the government and GREs.

“Customer deposits in Saudi Arabia were relatively more resilient during this period,” said Ms Urgan. “But, we note that six out of the 26 banks we rate in the Gulf reported negative deposit growth in the second quarter.”

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