Gulf-Based Islamic Banks Grapple With Weakening Regional Economies

(MENAFNEditorial) After delivering strong results in 2014, Islamic banks in the Gulf region face a gradually weakening operating outlook in 2015-2016, largely due to declining oil revenues. Global oil prices have plummeted since June 2014, and Standard & Poor's expects them to remain relatively weak through 2016.

Specifically, we forecast Brent crude to average $55 per barrel in 2015, $65 in 2016, and about $75 in 2017. Given the importance of oil-related revenues to the region's economies, the ensuing gradual weakening in economic conditions for the sovereign states that make up the Gulf Cooperation Council (GCC)--Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)--will in our view adversely affect their banking sectors. That said, we believe investor demand for Sharia-compliant products and supportive government actions will enable Islamic banks to continue to grow and gradually increase their market share.

"After several years of improving returns and strong growth we expect a gradual change in the operating conditions for Islamic banks in the Gulf in 2015–2016, largely as a result of the weakness in oil prices and its effects on regional economies," said Standard & Poor's credit analyst Timucin Engin.

"Although our credit growth projections remain largely unchanged for 2015, we believe deposit growth will slow somewhat due to relatively weaker liquidity conditions and asset quality will gradually deteriorate in line with the economic slowdown."

"These factors will in our view gradually increase credit losses at Islamic banks in 2015, leading to lower net income growth than in 2014," added Standard & Poor's credit analyst Suha Urgan. "Given that Islamic banks generally operate with healthy funding and capital positions, we expect them to adopt a conservative stance in 2015 and maintain strong levels of capital while looking to further diversify their funding base."

Standard & Poor's Ratings Services' analysis of the 2014 performance of a sample of 17 GCC-based Islamic banks--all pure-play commercial Islamic banks with a minimum balance sheet size of $5 billion--shows that they registered healthy balance-sheet growth of around 13% last year. At the same time, these financial institutions continued to make further recoveries in their lending books and improve bottom line results, supported by declining credit losses.