The net income of Arabian Gulf banks is forecast to drop by 5 to 7 per cent this year as the sector grapples with weak revenues and higher credit losses, according to Standard & Poor’s.
Bank profitability decreased last year amid a rise in money set aside to cover bad debts and slower loan growth as economies in the region slowed.
“Operating revenues are weakening, credit losses increasing and the net bottom line is under pressure,” said Suha Urgan, S&P’s Dubai-based lead analyst for financial institutions.
Banks are also suffering from tighter liquidity and slow asset growth.
Government and government-related entities’ (GREs) deposits, which account for 20 to 35 per cent of total Gulf deposits, have also declined.
“GREs’ deposits are by nature highly volatile,” said Mr Urgan. “We have seen major drawdowns last year. For this year our expectation is a sort of a normalisation of government and GRE deposits.”
Asset quality has also suffered as banks are increasingly exposed to weak sectors and led them to make higher provisions to protect themselves from non-performing loans (npl).
“The pockets of risks in terms of contractors, subcontractors, SMEs, [and] real estate in different parts of the region still continues,” said Mr Urgan.
“In 2017, we will see a visible increase in npl formation. The key part of the story lies in the change in the asset quality and the increase we are seeing in the cost of risk.”
And there is unlikely to be an uptick in corporate bond issuances this year, given the current economic environment, according to Karim Nassif, lead analyst, infrastructure, at S&P. But new corporate names could come to the market, as they did last year.
Companies are expected to look for innovative and creative financing means as bank lending tightens and to diversify their funding sources. The phased implementation of Basel III banking standards will also limit banks’ abilities to lend long-term to corporates.
“What we are seeing is group entities wanting to explore alternative funding options whether it be sukuk, whether it be ECA (export credit agency) financing, whether it be capital markets,” said Mr Nassif.
But most lending this year is expected to be sovereign debt sales to help plug fiscal deficits.
The credit-rating agency, which has downgraded the ratings of Oman, Saudi Arabia, Bahrain and Sharjah, expects a stabilisation in the outlook for Gulf sovereigns, with the exception of Oman, which has a negative outlook, according to Trevor Cullinan, S&P’s lead analyst for sovereign. He expects sovereign issuers to focus on international foreign currency debt, which could be risky.
“Now the governments are much more focused on issuing foreign currency but we see foreign currency debt as a potential risk as well,” said Mr Cullinan.
“If the debt is held mostly abroad, that is potentially a concern for us because we think foreign investors are less likely to stay committed to a country.”
dalsaadi@thenational.ae
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