Higher impairments signal end of banking boom

18 October 2016

Lenders’ profits will be lower as they manage problem loans

As GCC banks post their results from the first three quarters of 2016, it is clear that low oil prices are really starting to bite in the financial sector.

Banks profits had remained buoyant in 2015 and early 2016, propping up stock markets that had sunk with the oil price.

But now, in a weaker operating environment, non-performing loans ratios look set to rise. Higher impairments, together with lower liquidity, higher funding costs and lower non-interest income, are now reducing profit margins.

In the UAE, thousands of small and medium enterprises (SMEs) have been struggling to meet loan obligations. Banks are now collaborating to restructure these loans, but higher provisioning for impairments is impacting profits.

In Saudi Arabia, the construction sector is the biggest cause for concern. Fewer projects and delayed payments from government clients puts financial pressure on contractors and suppliers across the board.

Retail banks are also feeling the effects of cuts in public sector bonuses, benefits and pay rises, which will also dampen consumer spending.

Due to the lag in classifying and resolving problem loans, we can expect tighter profit margins for GCC banks through 2017.

But banks in the region are still expected to manage to stay in the black. Capitalisation and loan loss coverage are generally high by global standards.

Profits have been excellent over the last few years, but leaner days have arrived for banks.

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