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Abu Dhabi, UAETuesday 25 September 2018

S&P Global Ratings forecasts flat loan growth for GCC banks in 2018 and 2019 

Rating agency says higher interest rates won't necessarily help banks 

Mohamed Damak, a Dubai-based senior director at S&P Global Ratings, expects muted loan growth in the GCC through to 2019 as result of lackluster demand for debt and cuts in government spending. Alex Atack / The National
Mohamed Damak, a Dubai-based senior director at S&P Global Ratings, expects muted loan growth in the GCC through to 2019 as result of lackluster demand for debt and cuts in government spending. Alex Atack / The National

S&P Global Ratings expects muted loan growth in the GCC both for this year and the next averaging between 3 to 4 per cent, weighed down by lacklustre demand for debt and cuts in government spending.

While that is a slight improvement from the 2.6 per cent loan growth recorded last year in the GCC, it pales in comparison to the 5.6 per cent loan growth witnessed in 2016 and 10.1 per cent in 2015.

"The slowdown is very visible," Mohamed Damak, a senior director at S&P Global Ratings, told at a press conference in Dubai on Tuesday. "There's an overall slowdown in the economy, fewer opportunities, and government spending rationalisation. The fact is some of the governments are continuing to cut spending to adjust to the new reality. "

The profitability of regional banks will also be dented by higher interest rates, Mr Damak said. While banks in theory benefit from rising rates, the situation is complicated in the region because higher rates at a time of economic slowness is typically not a recipe for growth. Central banks in the GCC, with the exception of Kuwait, peg their currencies to the US dollar and hence follow the US Federal Reserve's monetary policy.

However, not all central banks are likely to raise rates because a hike could negatively impact clients, many of which have been under pressure over the past couple of years in the aftermath of the 2014 oil crash. Raising rates for some clients may impinge their ability to service their loans and increase the number of non-performing loans, he said.

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VAT is unlikely to have a big impact on the profitability of banks as lenders have become increasingly efficient in the advent of the digital age and are likely to become even more nimble as they invest in artificial intelligence and rely less on human resources, Mr Damak said.

That improvement in efficiency and the ability of banks to reduce levels of non-performing loans has helped lenders in the region be more resilient. As a result, S&P said that banks in the region remained profitable and have healthy earnings generation. Their non-performing loan ratio is steady at 3 per cent, the rating agency said.

Mr Damak declined to reveal specific loan growth estimates for individual countries but bankers and analysts have been predicting high single digit loan growth for the UAE in 2018, driven by an increase in government spending ahead of Dubai's hosting of Expo 2020.

Mark Robinson, the chief executive officer of Dubai-based Commercial Bank International (CBI), told The National earlier this month he expects 5 per cent loan growth for CBI and a similar amount for the banking market as a whole in 2018. Egyptian investment bank EFG-Hermes is also expecting an uptick in loan growth.

The latest quarterly results from banks are already showing signs of improvement. Emirates NBD, Dubai's biggest lender, said its fourth quarter profit rose 17 per cent.

Profits at Abu Dhabi Islamic Bank, the Emirate’s biggest Sharia-compliant lender, rose 33.4 per cent in the fourth quarter of 2017, beating analysts’ estimates, as fees and commissions income rose and impairments dipped.

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