Why GCC banks are expecting high profits in 2014
Analysts expect a strong rebound in credit growth and improvement in asset quality and profitability among GCC banks (File Archive/Shutterstock)
Click here to add Gulf Cooperation Council as an alert
Disable alert for Gulf Cooperation Council,
Click here to add Khalid F. Howladar as an alert
Disable alert for Khalid F. Howladar,
Click here to add Standard & Poor as an alert
Disable alert for Standard & Poor,
Click here to add Timucin Engin as an alert
Disable alert for Timucin Engin
The Gulf Cooperation Council (GCC) region’s healthy economic growth prospects for 2014, supported by high oil prices, are expected to keep demand for bank credit high and enable local banks to increase their earnings, according to leading credit raging agencies such as Standard & Poor’s (S&P) and Moody’s.
Analysts expect a strong rebound in the credit growth, improvement in asset quality and profitability in the year ahead.
“GCC banks benefit from adequate liquidity based on the highly liquid local deposit markets and improvements to corporate asset quality. In our view, most banks in the key banking markets in the Gulf region are likely to have healthy funding profiles, with sound, high-quality capital, in 2014,” said Timucin Engin, associate director, Financial Services Ratings, Standard & Poor’s (S&P).
Moody’s expects strong economic growth in the region to generate healthy surpluses for the region’s governments, which will be channelled into the economy through widespread infrastructure spending, boosting corporate borrowing.
“We expect robust average credit growth of more than 10 per cent for the GCC region, reflecting high growth rates in non-oil sectors,” said Khalid F. Howladar, vice-president-senior credit officer at Moody’s, said in note.
S&P projects credit growth in Saudi Arabia and the UAE to be in the range of 10–15 per cent in 2014. Lending in Qatar and Oman slowed during 2013 as demand from Oman’s private sector diminished, while certain projects in Qatar suffered administrative delays. As these projects are revived, credit growth is expected to accelerate.
In Kuwait credit growth has started to recover in line with increasing corporate activity and healthy retail growth. Credit growth in Bahrain will continue to depend on the trade, manufacturing, and retail segments in 2014. Lending to these sectors grew by more than 10 per cent, surpassing the average annual growth of 6.4 per cent in total domestic credit.
Low interest rates continue to limit Gulf banks’ net interest margins. However, most banks have seen a gradual decline in loan losses. Analysts expect this to continue to support earnings growth in 2014, but by less than in previous years.
The Gulf region’s dependence on the hydrocarbons sector remains a structural risk factor. Volatile commodity prices could have a significant impact on Gulf economies.
Some restructured loans in Kuwait and the UAE seen as sources of downside risks.
“We consider that the banks’ strong capital levels largely mitigate these risks,” said Engin.
The region’s traditional strengths — strong fiscal positions, persistent current account surpluses, and limited dependence on external funding — are likely to continue to support sovereign credit worthiness and thus sovereign support to the banking sector.
By Babu Das Augustine
- Yemen Central Bank headquarters to relocate from Sanaa to Aden
- Show me the money: Lebanon addresses bank transfer delay problems
- Swiss Leaks revisited: Strong Egyptian presence in banking scandal
- Saudi market plans IPO in 2018
- Understanding the ripple effect: 8 reasons the US economy has slowed down in Q1 of 2015
- 8-year-old Yemeni child dies at hands of 40-year-old husband on wedding night
- The World Cup honeymoon? Qatari banks enjoying 'rosy conditions'
- Economies in transition: Why only the GCC is forecasted to prosper in the Middle East in 2014
- GCC stabilized: Banking sector is comfortably profitable
- Why Saudi Banks have a lot to gain from expansionary fiscal policies