Oil price slump weighs on Gulf Arab Islamic banks: report

Rating agency Standard and Poor's said here on Wednesday Islamic banks in the Gulf region face a gradually weakening operating outlook in the rest of this year and the next, largely due to declining oil revenues, albeit long-term perspectives remain solid.

After several years of improving returns and strong growth "we expect a gradual change in the operating conditions for Islamic banks in the Gulf region in 2015-2016, largely as a result of the weakness in oil prices and its effects on regional economies," said Standard & Poor's credit analyst Timucin Engin in the report titled "Gulf-Based Islamic Banks Grapple With Weakening Regional Economies."

"We expect 2015-2016 to be relatively less benign for Gulf Islamic banks in general, although we still believe the long-term supportive factors for these banks remain unchanged," he added.

In the rating agency's opinion, the two most important factors influencing the Islamic banks' growth are an increasing demand for both retail and corporate Sharia-compliant banking products and government initiatives designed to support Islamic finance.

Oil prices (U.S. crude) currently trade 58 percent lower than a year ago. The International Monetary Fund estimates that the six states of the Gulf Co-operation Council GCC will earn 300 billion dollars less than in 2014.

However, Engin said "we believe investor demand for Sharia-compliant products and supportive government actions will enable Islamic banks in the region to continue to grow and gradually increase their market share."

Islamic banks do not charge interest and they are not allowed to invest into firms which produce alcohol, pork, entertainment or weapons. Global consultancy EY estimates that Islamic banks in the GCC manage assets worth 517 billion dollars or a 33 percent share of the global Islamic finance market.

"Although our credit growth projections remain largely unchanged for 2015, we believe deposit growth will slow somewhat due to relatively weaker liquidity conditions and asset quality will gradually deteriorate in line with the economic slowdown," said Engin.

"These factors will in our view gradually increase credit losses at Islamic banks in 2015, leading to lower net income growth than in 2014," added Standard & Poor's credit analyst Suha Urgan. Given that Islamic banks generally operate with healthy funding and capital positions, "we expect them to adopt a conservative stance in 2015 and maintain strong levels of capital while looking to further diversify their funding base."

S&P research showed that GCC-based Islamic banks increased their balance sheets by an average of 15.2 percent between 2009 and 2014, while their conventional peers registered an 8.8 percent increase. In 2014, Gulf-based Islamic banks grew at a rate of 12.6 percent, against 9.6 percent for conventional banks. Endit