MIDEAST: GCC banks face liquidity challenges as oil prices remain low

Persistently low oil prices continue to pressure the funding environment for banks across the Gulf Cooperation Council (GCC) countries, Moody’s Investors Service said in a report.

 
The impact of low oil prices on GCC banks’ stand-alone profiles has so far been most acute in terms of more challenging liquidity conditions, reflecting increasing government borrowings, reduced deposit inflows and rising interest rates.
"Lower oil revenues are driving tightening of liquidity in the GCC, with overall deposit growth slowing down significantly to around 3% in 2015 from around 10% in 2014," said Nitish Bhojnagarwala, author of the report. "Moreover, liquid asset buffers are broadly expected to decline by around 20% across the region over 2016," he added.
Although liquid asset buffers remain sound at around 20%-25% of total assets, these trends are driving up market funding levels of domestic banks, increasing their overall cost of funds and dampening profitability.
"While credit growth has slowed in the region due to lower GDP growth combined with falling business and consumer confidence, impact on loan performance so far has been limited and capital buffers remain robust," added Nitish.
The report also highlights that GCC governments are increasingly financing their fiscal deficits through the banks. "The banking system exposure to their respective sovereigns is increasing, such lending is broadly supportive of bank solvency profiles given the high credit quality and higher yields associated with the new longer term borrowing," said Khalid F. Howladar, a Senior Vice President at Moody’s.
"However, such borrowing can reduce the availability of bank credit to the private sector and increase concentration," he added.
Moody’s noted these pressures vary across the region and when combined with the pressures stemming from strong sovereign linkages drove the rating agency’s recent action to downgrade majority of banks in Oman and Bahrain and place the ratings of 31 banks under review for downgrade in all six countries on March 7.