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(P)GCC Bank Profits Squeezed

A boycott of Qatar by a Saudi-led bloc of Arab states is hurting the economies of all the countries involved, with Bahrain and Qatar the most affected
S&P also said that (P)GCC banks’ profitability would be hit by higher credit losses in the next two years as weak economic conditions persist.S&P also said that (P)GCC banks’ profitability would be hit by higher credit losses in the next two years as weak economic conditions persist.

The profitability of Persian Gulf Arab states' banks will deteriorate this year and in 2018 with several factors coming into play, S&P Global Ratings said in its report.

“We expect the slowdown at Islamic banks in the six (Persian) Gulf Cooperation Council countries (Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain and Oman) will persist in 2017 after asset growth declined to 5.3% in 2016 from 10.7% in 2014 … We see banks becoming more cautious and selective in their lending activities, triggering stiffer competition,” S&P said, news outlets reported.

The increased cost of funding, the ratings agency said, squeezed banks’ intermediation margins in 2016 and would remain high this year and in 2018.

“Very few Islamic banks have set aside significant amounts of profit-equalization reserves, which they build in good years and use to smooth returns to profit-sharing investment accounts holders if needed,” S&P said.

S&P also said that Islamic banks’ profitability would be hit by higher credit losses in the next two years as weak economic conditions persist.

Bank exposure to subcontractors, SMEs, and retail customers–especially expatriates–will likely fuel the upward trend for credit losses, it said.

“We expect Islamic banks’ revenue growth will decelerate, and that they will focus on their cost bases to mitigate the impact,” including cutting down on their physical market presence by pruning branches.

The strategy of Shariah-compliant Saudi banks in increasing business among corporates and small and medium-sized enterprises should tide them over the next few years, in the same way they benefited from this approach in 2016, S&P said.

This is in contrast with Qatari Islamic banks, where lower liquidity and cuts in government spending prompted them to pare down expansion plans. The country’s Islamic finance industry likewise faces further pressure this year after its Persian Gulf Arab neighbors cut diplomatic and trade ties with Doha in June.

“Although consolidation might be a way forward in some (P)GCC markets, we expect mergers will remain an exception in 2017-2018 rather than the norm,” S&P said.

Regional Row

A boycott of Qatar by a Saudi-led bloc of Arab states is hurting the economies of all the countries involved, with Bahrain and Qatar the most affected, Moody's Investor Service said last week, according to an AFP report.

The row has translated into a credit negative for the entire six-nation Arab block, Moody's said in a report.

Saudi Arabia, the UAE, Bahrain and Egypt on June 5 severed diplomatic ties and imposed economic sanctions on Qatar, accusing it of backing terrorist groups. Doha has denied the charges.

"The severity of the diplomatic dispute between Persian Gulf Arab countries is unprecedented, which magnifies the uncertainty over the ultimate economic, fiscal and social impact on the (P)GCC as a whole," said Steffen Dyck, Moody's vice president.

Qatar faces large economic, financial and social costs stemming from related travel and trade restrictions, it said. The impact on Qatar so far has been most acute for trade, tourism and the banking sector.

Sizeable capital outflows in the vicinity of $30 billion flowed out of Qatar's banking system in June and July, with further declines expected as (P)GCC banks opt not to roll over their deposits, Moody's said.

It estimates that Qatar used $38.5 billion—equivalent to 23% of its GDP—to support the economy in the first two months of sanctions. Moody's said it does not expect that Qatar will have to borrow from the international capital market this year, but its financing costs will increase.

The standoff could also impair the sustainability of Bahrain's currency peg to the US dollar and will also increase the cost of borrowing for the kingdom, the poorest of the six oil-rich (P)GCC nations.

The diplomatic rift will inevitably impair the functioning of the (P)GCC more severely as the row prolongs.

Meanwhile, the head of the Qatar Investment Authority said that the lingering Arab states' political crisis was having little impact on the $300 billion sovereign wealth fund of the gas-rich nation.

In a rare public appearance, Sheikh Abdullah bin Mohamed bin Saud al-Thani, chief executive at the QIA, said there was "no problem" for the fund despite the crisis passing the 100-day mark.

 

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