S&P Global Ratings forecast oil prices will stabilize at $50 per barrel in 2017 and 2018, with unweighted average GDP growth in the six GCC countries at 1.9% in 2017 and 2.4% in 2018, after 2.3% in 2016. S&P expects the slowdown in growth at both conventional and Islamic banks in the region will persist. Asset growth stabilized at 6.4% in 2016 for Islamic and conventional banks in our sample, compared with 6.6% and 6.9% respectively in 2015. The rating agency said asset growth will drop to about 5% as governments› spending cuts and revenue-boosting initiatives, such as tax introductions, reduce opportunities in the corporate and retail sectors.
“We see banks becoming more cautious and selective in chasing high-quality lending opportunities, triggering stiffer competition.”
Although the economic slowdown was and will remain more pronounced in Saudi Arabia, Islamic banks› growth accelerated there in 2016, thanks to their strategy to increase their foray into the corporate and small and midsize (SME) sectors. By contrast, the slowdown was deeper in Qatar, where a mix of lower liquidity and government spending cuts prompted banks to curtail their pace of expansion. Asset growth was about nil in Kuwait over the past year, hit by the depreciation of some foreign currencies and the ensuing impact on the financials of some leading Kuwaiti Islamic banks. Lastly, despite the tepid economy and the drop in real estate prices in the UAE, Islamic banks continued to expand at high single digit figure.
The asset quality indicators of GCC Islamic banks remain on a par with those of their conventional counterparts. Both Islamic and conventional banks are well entrenched in their local real economies in the GCC. As the economic cycle turns, “we think that asset quality indicators will continue to deteriorate in 2017-2018. The weakening that has already occurred was not noticeable in 2016 because – as is typical – banks started to restructure their exposures to adapt to the shift in the economic environment. Therefore, we saw an increase in restructured loans in the GCC in 2016, but we didn›t observe a marked increase in nonperforming loans (NPLs) or cost of risk. We think the deterioration will be more visible in 2017-2018. Although some market participants maintain that Islamic banks will fare much better than their conventional counterparts due to the asset backing principle inherent to Islamic finance, we think they will be on equal footing.”
Overall, S&P believes that subcontractors, SMEs, and expatriate retail exposures will bear the brunt of the turning economic cycle and prominently contribute to the formation of new NPLs in 2017 and 2018.—Agencies