Moody's low oil prices to pressure GCC bank profits

05/03/2015 05:22 AST

In a new report that analyses the likely impact of a prolonged period of low oil prices on banks from the Gulf Co-Operation Council (GCC), Moody's says it expects that the unique interlinkages that exist between oil, public spending and banks in the region will first result in reduced banking system liquidity, with secondary effects on credit growth and profitability. Nonetheless bank ratings are expected to remain broadly resilient.

The report analyses the various channels through which a prolonged periodof low oil prices will affect banks in the region, showing that it is not through their direct exposures to the oil sector that the banks would be affected but rather through reductions in their government relateddeposits and the heavy reliance of the economy on public spending, both of which will be affected by lower earnings from oil.

"As a result of sustained low oil prices, we expect banking systems in the region will primarily face a decline in liquidity as government-related deposit inflows are reduced" says Khalid Howladar, Senior Credit Officer at Moody's.

According to Moody's, government-related deposits provide a substantial 10% to 35% of banks' non-equity funding.

At the same time, Moody's also expects that lower oil prices will weigh on confidence and hence economic growth, leading to weaker lending growth and, ultimately, lower profitability. Nevertheless, the rating agency anticipates broad resilience in the GCC banks' fundamental credit profiles given their robust capital and liquidity buffers.

"The GCC banks' stock of liquid assets are healthy and their reliance on market funding is generally limited, leaving some headroom for banks to adjust to changing funding conditions in an orderly fashion" explains Mr Howladar. "Furthermore, the downside effects of the lower oil prices projected for 2015 and 2016 are likely to be moderated by the proactive policy responses of GCC governments, which implies that each of the GCC banking systems will display varying degrees of resilience that are broadly in line with the pressures faced by their respective sovereigns" adds the Moody's analyst.

The rating agency notes that Kuwait (Aa2 stable), Qatar (Aa2 stable),Saudi Arabia (Aa3 stable) and the United Arab Emirates (Aa2 stable) areable to better support their economies and banking systems due to theirsizeable reserves, whereas banks operating in Bahrain (Baa2 negative)and Oman (A1 negative) are more vulnerable to a more pronounced or moreprolonged period of low oil prices than expected.

"The Oman and Bahrain banking systems are the most vulnerable to a long-term drop in prices. Both sovereigns have a weak combination of high fiscal break-even oil prices and relatively low or near zero reserve buffers" notes Nitish Bhojnagarwala, an Assistant Vice president at Moody's.

Moody's central assumption is that oil prices will average $55/barrel(Brent) in 2015, rising to $65 on average in 2016.

CPI Financial