GCC banks to come under pressure from oil slump

27/02/2015 05:41 AST

The global banking system will probably benefit from the dramatic fall in the price of oil – but the energy-revenue reliant banks of the GCC could face funding pressure if oil prices remain low, according to ratings agency Moody’s Investor Services.

“We do not see any imminent threats from rated banks from the recent precipitous decline in oil prices,” new research from Moody’s banking team concludes. “On balance, lower oil prices will broadly support bank creditworthiness globally and improve debt-service capacity for corporate and household borrowers.

“Nonetheless, direct and indirect exposures to the drop in oil prices pose the potential for asset quality and earnings deterioration for several banking systems, particularly in those countries that are net oil exporters the longer prices remain depressed.

“Banks in the GCC could face pressure on funding liquidity in the event that the historically high despot inflows from government and government-related entities decline,” Moody’s adds.

Analysts and policymakers in the GCC have been trying to analyse the financial effects of the big fall in oil prices over the past six months, when crude has dipped as much as 50 per cent to a low of about US$45 for benchmark Brent.

Most experts see the fall in energy costs as a positive for the world economy, with the IMF predicting a 0.7 per cent increase in global GDP as a result. American, Chinese and European manufacturers benefit from a big cut in their fuel bills.

The effect of the decline has been likened to a 1 per cent cut in tax rates for consumers in western economies, spurring domestic demand in these regions.

Conversely, producing countries like the GCC can expect a reduction in economic activity and a decline in oil-related spending power, leading to reduced banking deposits and a decline in the value of assets in their banks.

However, Moody’s says the financial capital GCC banks have accumulated during five years of historically high oil prices will cushion the effect of a decline. “While oil prices are currently below most GCC countries’ fiscal break-even point, governments generally have the resources to mitigate the immediate impact and maintain a supportive environment for banks.

“A prolonged period of depressed oil prices would reduce surpluses, weaken investor confidence and economic activity and exert pressure on GCC government to rationalise expenses,” Moody’s says.

“Loan growth and profitability are also likely to suffer, although a material impact on asset quality is unlikely in the near term.”

The ratings agency says the banks of Bahrain and Oman look the most vulnerable to sustained lower oil prices, given high break even prices, tighter fiscal positions and relatively low government reserves.

The Saudi and the UAE banking systems are likely to be “moderately” affected by low oil prices despite large buffers of reserves and growing non-oil prices, mainly because of what Moody’s calls “ relatively high fiscal break-even prices.

The agency estimates these at $106 for Saudi Arabia but as low as $77 for this country.

“Both countries can comfortably support elevated public sector spending levels over the next 12 to 18 months, which in turn will support bank fundamentals.

The effect of continued low prices on financial reserves is a crucial factor in estimating the repercussions for regional economies.

New research by the London economics consultancy Capital Economics shows some GCC economies are already trading at a deficit on their current accounts.

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