• Asset and loan growth for GCC banks falls to single figures year-on-year after first half of 2015
  • Income growth fell 3 per cent year-on-year for the same period, and is expected to remain low
  • Lower deposit growth means banks will be forced to use more expensive funding from the market

Income and asset growth for GCC banks is expected to slow due to low oil prices and slowing regional economies, according to US-based Standard & Poor’s (S&P’s) ratings services.

The bank results analysed by S&P showed asset and loan growth was in single figures, the slowest growth rate since 2013.

Income growth fell to 3 per cent year-on-year at the end of the first half. It has fallen from 6 per cent in 2014 and 10 per cent in 2013.

This is driven by a cautious lending policy by banks as economies slow, but also reduced government-related entity (GRE) borrowing in Qatar, fewer real estate transactions in the UAE and mortgage restrictions in Saudi Arabia.

However, different GCC countries are feeling different effects. Some Kuwaiti banks saw no asset growth in the first half, compared with 9 per cent growth in both 2014 and 2013. In contrast, Qatari banks posted year-on-year asset growth of about 15 per cent, an increase on last year, according to S&P.

Asset quality will also deteriorate as the regional economy slows and a new credit cycle begins. Loan loss provisioning is still high, at 142 per cent.

Falling government banking deposits, by 14 per cent in the UAE and 3 per cent in Saudi Arabia, as well as slowing growth in consumer deposits, are also affecting banks. The lenders rely on deposits for 70-85 per cent of their liabilities.

Market funding is getting more expensive, with inter-bank funding rates in Saudi Arabia and the UAE rising by 0.1 per cent over the past three months. The increased funding costs will reduce earnings, as income growth from transaction fees also slows.

“Signs of weakness are evident in both interest income and non-interest income,” says S&P analyst Timucin Engin. “Simply put, the squeeze on interest margins has not yet eased. Low interest rates are returning less on bank assets, but funding costs are gradually increasing.”

Despite high competition keeping lending costs low, this may push up financing costs for some companies. S&P expects Gulf banks’ net income growth to decline below 10 per cent in 2015 and potentially slow further in 2016.

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