JEDDAH — The significant drop in oil prices could lead to higher credit losses and lower liquidity for some banking systems in oil-producing countries, Standard & Poor's Ratings Services (S&P) said. In a report entitled "How Will Lower Oil Prices Affect Banks in 10 Oil-Exporting Countries?" released Monday, S&P credit analyst Mohamed Damak said "while our base-case scenario assumes this drop will not significantly affect the performance of oil-exporting countries' banking systems, the systems of countries with low fiscal buffers, significant economic imbalances, and high dependence on oil-related bank deposits may come under pressure." Following the significant drop in oil prices over the past few months, reaching around $55 per barrel (/bbl) for Brent crude as of mid-February compared with more than $100/bbl a year ago, S&P has revised its price assumptions. It now expect Brent's price to stabilize around $55/bbl in 2015 and increase slightly to around $65/bbl in 2016. In light of this decline, the report looks at the banking systems in 10 oil-exporting countries, namely six Gulf Cooperation Council countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates), Brunei, Kazakhstan, Malaysia, and Nigeria. It selected these countries based on the oil sector's significant contribution to their exports, economies, and government budgets. Oil price decline could affect these countries' banking systems either directly through banks' exposure to and deposits from oil- or government-related companies or indirectly through lower investments and economic growth, which may weigh on banks' asset quality and profitability indicators. S&P expects Malaysian banks to show resilience because it thinks the government is unlikely to significantly cut its investments but will instead reduce operating expenses. The lower economic growth it expect for 2015 in Malaysia (to 4.6 percent in 2015 from six percent in 2014) will have some impact on banking system earnings through reduced new lending. However, the rating agency said it expects the overall risk to remain in check. The significant decline, the rating agency forecast in Brunei's real GDP growth (to -4.0 per cent in 2015 from 0 per cent in 2014) is underpinned by a very strong dependency on the oil and gas sector. It expects GDP growth to rebound in 2016, assuming an increase in oil prices. S&P expects banks' return on equity in most of these countries to drop in 2015. On a positive note, however, most of these banking systems display adequate profitability, with the exception of Kazakhstan, where legacy asset quality problems from the real estate correction that started in 2007 pressure profitability. Despite strained liquidity, lower growth and relatively good funding profiles will temper the pressure. S&P's believes low oil prices will result in decreased government revenues and exports, and will hamper banking systems' liquidity. It said government deposits account for 28 percent on average of total bank deposits for these 10 countries and range from three-quarters of total deposits for Brunei as of Sept. 30, 2014, to around 7 percent for Malaysia as of year-end 2014. Lower deposit growth may weaken the funding profile of the 10 systems we looked at and push some of the banks to increase their reliance on external debt. However, the relatively good funding profiles of these systems and the expected lower growth on the asset side somewhat mitigate this risk. — SG/Agencies
