Lenders in the world's largest oil exporter, already dealing with a fragile economy, now have to contend with plummeting crude prices
Saudi Arabian banks may pay the biggest price among their regional peers as the kingdom enters an oil-price war.
Lenders in the world’s largest oil exporter, already dealing with a fragile economy, now have to contend with plummeting crude prices - which could lead to more problem loans - and the fallout of the coronavirus that’s closed the kingdom’s schools and limited cross border movement. A surprise interest rate cut last week also means profit margins are under pressure.
“Sustained lower oil prices would undoubtedly impact the private sector and lead to a pick-up in delinquencies,” said Chiro Ghosh, an analyst at investment bank SICO in Bahrain. Saudi banks with a high share of corporate loans “are at greater risk” so will “focus more on mortgage loans to protect their margin.”
While the full impact of oil’s 43 percent drop this year are unclear, profits may come under pressure in the longer term if the kingdom reins in spending. Tighter domestic budget conditions could also result in less state deposits being parked with banks, reducing their ability to use that money for lending and increasing their cost of capital.
Citigroup analysts Rahul Bajaj and Ronit Ghose this week cut their earnings estimate for Saudi banks in 2021-22 by about 10 percent to reflect lower local interest rates and the failure of the OPEC+ agreement.
Most are risk are those lenders that already have high loan-to-deposit ratios, with Banque Saudi Fransi, Alinma Bank, Riyad Bank and Bank AlBilad the most vulnerable, according to Bloomberg Intelligence.
The kingdom’s lenders aren’t the only ones that face threats to their earnings. Arqaam Capital also lowered its outlook for Gulf banks to take into account the reduction in US interest rates and lower oil prices.
“The backdrop is tougher for the whole regional sector,” said Hasnain Malik, head of equity strategy at Tellimer. “Generally the health of the banks in the Gulf Cooperation Council is a reflection of the sovereign. That implies most risk for Bahrain, Dubai and Oman.”
In the United Arab Emirates, the impact of the oil war and coronavirus adds to the pressure banks are already under as an ongoing property slump shows no signs of abating. The crisis is fanning non-performing loans and forcing banks to make higher provisions.
Dubai is also facing an impending debt wall, with the prospect of having to restructure a chunk of $23 billion in loans to government-related companies maturing at the end of 2021, according to Fitch Ratings.
“Worst positioned are the UAE banks, in our view, on weaker macro backdrop, with increased pressure on the tourism, trade, and real estate sectors,” said Sara Boutros, a senior analyst at CI Capital. “Most GCC banks can sustain operating amid an environment of lower oil prices, given their adequate capitalization and provisioning buffers, but this would definitely come at the expense of growth.”