Owing to the knock-on effects of lower oil prices on growth and asset quality, earnings could weaken over the next several quarters, Standard & Poor’s Ratings Services says in its report.

The earnings of GCC banks are set to slide after their solid first half results, Standard & Poor’s Ratings Services’ has said in a report citing “lower oil prices” as the reason.
GCC banks reported a good set of earnings in the first half of 2015 thanks in part to declining credit losses — and despite the continued squeeze on interest margins.
But, owing to the knock-on effects of lower oil prices on growth and asset quality, earnings could weaken over the next several quarters, it said.
The S&P analysis is based on a sample of some 26 rated banks in Qatar and elsewhere in the GCC.
“In line with our expectations, banks seem to have adopted a more conservative stance in terms of asset growth, given the drop in oil prices and its effects on the region’s economic outlook,” said Standard & Poor’s credit analyst Suha Urgan.
The deleveraging of government-related entities (GREs) in Qatar, tighter mortgage regulation in Saudi Arabia, and a drop in real estate transactions in the UAE also held back asset growth.
Customer deposits too lost momentum in the first half, S&P pointed out. The GCC banks, according to S&P sample survey, increased customer deposits 6% year-on-year (y-o-y) in the first and second quarters, compared with more than 10% y-o-y in all of the previous eight quarters.
In the UAE in particular, several banks saw a sharper slowdown due to the drawdown of deposits from the government and GREs. “Customer deposits in Saudi Arabia were relatively more resilient during this period,” said Urgan.
“But, we note that six out of the 26 banks we rate in the Gulf reported negative deposit growth in the second quarter,” he said.
Growth in aggregate operating income for the GCC banks S&P studied dropped to 3% y-o-y from 6% y-o-y in 2014 and 10% in 2013.  “Signs of weakness are evident in both interest income and noninterest income,” said Standard & Poor’s analyst Timucin Engin.
“Simply put, the squeeze on interest margins has not yet eased. Low interest rates are returning less on bank assets, but funding costs are gradually increasing.”
Noninterest income had partly offset the squeeze on interest margins, but also weakened.
Out of the 26 banks in Standard & Poor’s sample, 10 posted a y-o-y contraction in non-interest income in the first half of the year.
Other areas of weakness were a contraction in fees for loan origination, brokerage, and capital market activities.
Earnings growth was more resilient thanks to declining provisions, which helped offset slower growth in operating income. Provisions declined 9% y-o-y in the first half for the 26 banks.
Net income growth declined to 4% y-o-y in the second quarter, compared with 7% in the first quarter and more than 10% in the previous three quarters.
“Over the past few years, GCC banks’ declining credit losses were a key driver of earnings growth and resilience in return on average assets,” Urgan said.
“But after five years of decline, credit losses are set to rise for Gulf banks as they cope with slowing growth and capital market volatility. We expect Gulf banks’ net income growth to decline below 10% in 2015 and potentially slow further in 2016,” he added.