GCC banking sector’s asset growth will lag the improvement in the economic cycle, and begin recovering from 2017 everywhere except in Saudi Arabia, BMI Research has said in its latest report.
“However, low oil prices mean that the recovery will be limited. In this riskier operating environment, banks will favour safer government debt, crowding out private borrowing,” the Fitch Group company said.  
In 2017, BMI Research expects the operating environment to improve for commercial banks in all of the Gulf Cooperation Council, with the exception of Saudi Arabia. The recovery will be gradual, and BMI Research believes that there is no going back to the boom years of 2007-2014, when oil prices averaged almost double what it forecast for the coming years.
Amid tightening liquidity and a riskier economic backdrop, banks will favour safer government debt over riskier private sector lending, it said.
Beset by tightening liquidity and the economic slowdown, a majority of commercial banks in the GCC are seeing profits fall. Out of the 10 largest banks in the GCC, seven saw smaller third quarter 2016 profits compared to the same period of 2015.
Across the board, banks increased provisioning for non-performing loans over the first nine months of 2016, which dragged down profitability and further tightened liquidity.
“We believe that GCC banks will adopt a more prudent attitude in lending to the private sector over the coming quarters, as the economic environment is now riskier. Instead, GCC banks will increase their exposure to safer government debt,” BMI Research said.
Over the coming quarters, it said Gulf governments will continue to issue domestic debt to fund their budget deficit, which it forecasts at $75bn on aggregate for 2017.
BMI does not expect GCC banks to return to the same rate of asset growth they recorded prior to the oil-price slump. Pressures on the banking sector will remain, in particular as the deposit base continues to erode. Across the GCC region, in order to cover their fiscal shortfalls, governments have withdrawn funds they had deposited in their respective domestic banks during the years of large surpluses.
As a result, loan-to-deposit ratios (LTD) have increased throughout the region. In Saudi Arabia and Kuwait, the central banks raised the maximum allowable LTD in early 2016, to give more leeway to banks in the more challenging environment.
The fall in deposits has led to a tightening in liquidity. The spread between domestic interbank rates and USD/Libor has surged in Saudi Arabia and Bahrain. To attempt to relieve some of the pressure, Saudi Arabia injected $5.3bn in the banking sector in September in the form of time deposits on behalf of government entities. This fell short of the objective of easing conditions, and the interbank rate has continued to rise since.  In Qatar, commercial banks are increasingly looking overseas for funding, with net foreign borrowing increasing by close to 40% y-o-y in July.