Arabian Gulf banks may struggle to maintain profit growth rates of previous years as lower oil prices crimp regional economic growth, according to the Boston Consulting Group.
“2016, overall will become even slightly more challenging,” Reinhold Leichtfuss, senior partner and managing director at BCG Middle East, told reporters in Dubai.
“If nothing strong really happens to the price of oil and it remains on a lower level, that will put a little bit of pressure on government spending, on salary growth in a number of countries and the economy is not growing as much as it would in previous years. There will be continued pressure on profits.”
Mr Leichtfuss did not give an estimate for overall GCC bank growth this year but said the profitability of Arabian Gulf banks waned in 2015 as lower oil prices depressed appetite for taking on loans.
Provisions, or the amount that banks put aside for bad debt, also rose overall for the first time in many years as some small businesses struggled to pay debt, he said.
In a study unveiled on Monday, the group said its BCG banking index of 45 banks in the region grew 6.3 per cent last year compared to 14.7 per cent in 2014 as the more than 60 per cent drop in oil over the past two years finally took its toll on the banking industry.
Mr Leichtfuss also said that interest rates for bank customers may rise as governments pull money out of lenders to plug deficits created by lower revenues from the sale of oil, pushing the available cash supply available for lending lower.
And while the drop has affected some more lenders more than others, it has not really spared anyone, he said. That has made it difficult for many small and medium-sized enterprises (SMEs) to service debt.
Abdul Aziz Al Ghurair, the chairman of the UAE Banking Federation, warned in November that a number of small business owners might have fled the country, leaving unsettled debts of about Dh5 billion.
Banks have in general been shying away from SMEs because of the high risk of lending to fledgling businesses.
Gulf Finance, the Dubai speciality SME financier, shed light on the situation in a report showing that confidence among SMEs slipped to new lows in the fourth quarter of last year, when the fall in the price of oil was most fierce.
However, Mr Leichtfuss said that he does not expect the fallout in SME lending to spread to bigger corporations or other segments of the lending business.
The Egyptian investment bank EFG-Hermes warned last month that the fallout sparked by SME debt delinquencies may spread to individual borrowers as the strain from the weakening economy increases.
The UAE is the fourth-biggest exporter of crude oil in the world and the federal government relies on sales of oil to fund more than 65 per cent of its budget.
Separately, the UAE Central Bank said yesterday that lending growth in the country rose at an annualised 7.9 per cent in February. In January lending grew by 7.4 per cent.
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