Tighter liquidity conditions, weakening asset quality and slowing economic growth are expected to further tighten lending standards of GCC banks as they become more selective in granting loans according to analysts.
According to analysts from Coface, a trade credit management and risk information company the persistent low oil prices is weighing on liquidity conditions across GCC countries. This is slowing down government fiscal revenues, tightening liquidity in the banking sector, inflating the costs of funding and dragging down economic growth.
Read more: GCC banks' liquidity to improve in 2017, but pressures remain
The International Monetary Fund (IMF) has forecast the region’s GDP growth at 2.6 per cent in 2017, various other forecasts have placed the growth rates in the range of 2 to 2.8 per cent. Analysts expect further cuts in government subsidies are expected to exacerbate the slowdown in deposit growth of banks.
“Restricted resources would make banks more selective on granting loans in 2017 and 2018. This would also limit access to funding for corporates, especially for small and medium-sized companies, as they represent higher risks,” said Seltem Iyigun an economist at Coface.
Overall, loan growth is expected be close to 5 per cent in 2017, far lower than the average annual growth of 9.2 per cent recorded between 2012 and 2016.
Concern for Oman and Bahrain
Rising interbank rates and slowing money supply in the region is impacting loan growth across the region. This situation has been particularly a concern for Oman and Bahrain, as they have the lowest fiscal and external buffers in the region. This means that tightening liquidity conditions have had a deeper impact for corporate financing in these two countries compared to others, such as the UAE and Saudi Arabia, which benefit from stronger financial buffers.
Demand for credit in the UAE appeared to have stabilised following the recovery registered in the previous quarter, according to the second quarter credit sentiment survey of the Central Bank of UAE.
Read more: Funding Pressures on GCC Banks to Ease this Year As Oil Recovers: Moody's
Results from the June quarter survey suggested that most of the survey respondents reported no change in credit standards for both business and personal loans. Overall, results from the survey suggest that credit conditions within the UAE remain healthy with near term expectation of a continuation of such trends.
Spending cuts
Sharp decline in oil prices over the past few years have forced many countries to adopt spending cuts, axing of low priority projects and restrictions on government sponsored subsidy programmes, resulting in job losses and decline in disposable incomes leading to a gradual increase in non-performing loans (NPLs) of banks.
The first half results of a number banks across the region showed an increase in impairment costs and higher funding costs constraining loan growth and profit growth.
Analysts say, apart from rising cost of funds, regulatory pressures such as the compliance to Basel III standards, implementation of IFRS 9 are likely to lock-in significant amount of liquidity
“The banking system in Gulf Countries is facing new challenges following the decline in oil prices. Funding costs have increased due to US interest hikes — which invariably affects the UAE dirham as it is pegged to the greenback — and capital adjustments are necessary, due to the recently implementation of Basel III requirements, which will require banks to hold a significant amount of high quality liquid assets in 2018-2019,” said Massimo Falcioni, CEO for Middle East Countries at Coface.
Budgets
According to Coface analysts, heavy dependence on oil has dragged down government fiscal revenues in many countries across the region. This has, in turn, had a bearing on liquidity in the banking sector and the results of corporates. The region’s budgets for 2017 showed reductions in public spending which will lead to the postponement of some important projects. This will make cash flow management more difficult for companies and reduce the opportunities for banks to finance mega-projects, which are among their main sources of profitability.
By Babu Das Augustine
