By Satish Kanady
DOHA: GCC banks are exposed to swings in global oil prices. The price movements will affect bank balance sheets in a significant way, said a policy paper presented by IMF at the annual meeting of GCC Finance ministers and central bank governors in Doha recently.
The document, put out on public domain by IMF last week, noted liquidity conditions are likely to worsen over time as oil prices and deposit growth remain low. Sustained lower oil prices over time would also lead to fiscal tightening and reduce the growth rates of non-oil GDP and real credit.
This would lead to a decline in equity prices, creating negative wealth effects and further depressing private sector consumption and non-oil GDP. In this environment, bank NPLs (nonperforming loans) are likely to rise as borrowers have increasing difficulties servicing their debts, IMF cautioned.
According to the Fund document, growth rates of real oil prices and real non-oil GDP are key determinants of NPLs in the GCC. A drop in the growth rate of oil prices results in a rise in the ratio of NPL to gross loans, and a reduction in the real growth rates of bank credit and deposits. A one percent decline in oil prices leads to a 0.2–0.3 percentage point decline in real credit growth and a 0.1-0.2 percentage point decline in real deposit growth — with timing varying from immediate to 2-3 year lags.
The NPL ratio would increase by about 0.1 percentage point in the long run. There is also a feedback effect within bank balance sheets, as a higher NPL ratio leads to lower real bank credit and deposit growth.
The IMF document, however, stressed GCC banks are well-capitalized, liquid, and profitable. Although oil prices have declined since mid-2014, government spending is yet to slow down significantly and bank balance sheets remain strong. As oil prices and credit increased rapidly over the past decade, capital buffers and provisioning levels simultaneously increased to levels above those in many other commodity exporting countries.
More generally, GCC banks currently hold high levels of capital to limit structural risks in their credit portfolio stemming from concentration and interconnectedness. NPL ratios are at low levels, and loan loss provisions and profits are strong to enable coverage of NPLs.
Credit quality in GCC banks is high and similar to banks in other commodity exporting countries.NPL ratios in both the GCC and many other commodity exporters are below five percent (except the United Arab Emirates, Azerbaijan, Kazakhstan and Russia). For UAE banks, NPLs rose in the wake of the 2008–09 financial crisis, but have been on a declining trend since.
GCC banks’ profitability and loan loss provisions are strong. Profitability in GCC banks is high and provides the first line of defence against losses. Moreover, the provisioning ratio — measured as the ratio of total provisions to nonperforming loans — is also high, above 100 percent on average at end-2014. This would help cover NPL write-offs, although the practice in some GCC countries of applying provisioning rates on net exposures may expose banks to underprovisioning if collateral is not properly assessed.
Non-performing loans have declined in recent years. During the early 2000s, the distribution of the NPL ratio was noticeably “fat tailed” on the right –some banks used to have NPL ratios of 40 percent or above. The distribution improved through 2008, with highest ratio falling below 15 percent.
The Peninsula
