Reduced prices of oil will soon bring a halt to sufficient earnings of Gulf banks. The crumbling oil prices are putting pressure on the banking sector. The instant effect will be on the retail banking rules, property sector weakness and bad loan worries.
The predictions prevail stating that oil prices will fall even further and will lead the liquidity to dry up principally. The predictions further confirm oil prices to drop as low as $10-20. The prices of oil will eventually recover after a few years. The situation is alarming to the banks in the region as the deposits from government and other bodies provide up to 10 per cent of the non-equity funding.
The banks have yet to be affected as the government still has humongous reserves and can take form foreign reserves, foreign or local banks as per regional director of financial institutions at Fitch Ratings
The most exposed banks are the ones in Saudi Arabia as they are hoarding largest oil reserves.
The issue of retail credit can be resolved by Saudi mortgage rules that were introduced back in November, last year. This will cover the highest loan to value ratio. Most of the banks stretched mortgage loans as high as around 80 per cent loan to value ratio.
Few banks are already coping up with a restraint on the retail fees. This has hurt earnings in Al Rijhi Bank which is one of the largest lender in the kingdom.
Banks will be affected drastically though as they come in exposure to poorly doing telecommunications firms such as Etihad Etisalat which expanses to around 14 billion riyals as per Al Jazira Capital.
In the Gulf region, UAE has the sturdiest bank earnings.
The economy of UAE stays stable as banks set fewer provisions aside to successfully cover the bad debt. Last month, the process was enhanced at the time when Dubai bank stated that it gained 100 percent approval from creditor for its debt restructuring plan of $14.6.
Nevertheless, fallen oil prices will leave their affects into the property and equity markets. They will require banks to reverse this downward trend, leading to further provisions against a fresh wave of bad loans. It is still vague if the trend will appear in the first quarter.
While it is to be noted that as UAE is politically stable and is recognized as the 8th largest oil producer in the world and the fact that four people in UAE are among the top 100 richest Arabs, it can deal with the situation without letting the banking and other industries suffer and the economy will stay steady. When the global economy crumbled, recovery was done by increasing oil prices. The countries are dependent on high prices for economy to grow since long time. So, according to reports, Gulf state needs to stop relying on fuel resources as their main income source.