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Khaleej Times
21-04-2025
- Business
- Khaleej Times
GCC faces indirect but significant risks from trade war
The GCC region faces mounting economic challenges as intensifying global trade tensions, particularly US tariff threats, and a sharp decline in oil prices ripple through its markets. A recent S&P Global Ratings report highlights the indirect but significant risks to GCC economies, with banks likely to face increased market volatility and investor risk aversion. However, the region's financial institutions appear well-positioned to weather the storm, bolstered by strong liquidity, profitability, and capitalisation, according to credit analyst Mohamed Damak. S&P has revised its oil price forecast to $65 per barrel for 2025, down from previous estimates, reflecting heightened trade disputes and weaker global demand. This drop, a roughly 15 per cent decline from mid-2024 Brent crude averages of $80 per barrel, threatens government revenues and spending in oil-dependent GCC economies. Saudi Arabia, the UAE, Qatar, and other GCC nations rely heavily on hydrocarbon exports, which account for 60-80 per cent of fiscal revenues across the region, as per International Monetary Fund (IMF) data. Lower oil prices could curb public investment in projects like Saudi Arabia's Vision 2030, dampening growth in both oil and non-oil sectors. The IMF projected GCC GDP growth at 3.2 per cent for 2025 before the tariff escalation, but analysts now warn of a potential downgrade to 2.5 per cent if oil prices fall further. A sustained drop below $60 per barrel could exacerbate fiscal deficits, with Saudi Arabia's breakeven oil price estimated at $80-$85 per barrel by Bloomberg Economics. Reduced government spending may also pressure corporate earnings and consumer confidence, indirectly straining banks' asset quality. In a recent report, Fitch Ratings noted that GCC exports to the US are predominantly hydrocarbons, which are exempt from tariffs. Non-hydrocarbon exports, facing a 10 per cent tariff (or 25 per cent for aluminium and steel), constitute a small fraction of trade, insulating banks from direct tariff-related shocks. 'However, the real threat lies in declining oil prices and reduced global demand, which could curb government spending — a critical driver of banking activity in the GCC. Lower oil prices and weaker global economic activity could lead to reduced government spending, which strongly affects bank operating conditions in most GCC countries,' Fitch stated. Despite these headwinds, GCC banks are entering the turmoil from a position of strength. At year-end 2024, the region's top 45 banks reported an average nonperforming loan (NPL) ratio of 2.9 per cent, significantly below the global banking average of 4.5 per cent, according to World Bank data. Provisions exceeding 150 per cent of NPLs provide a substantial buffer against potential loan defaults. Additionally, banks' profitability remains solid, with a 1.7 per cent return on assets, and capitalization is robust, with an average Tier 1 capital ratio of 17.2 per cent, well above Basel III requirements. S&P's stress tests underscore this resilience. In a moderate scenario, assuming a 30 per cent NPL increase or a minimum 5.0 per cent NPL ratio, 16 banks could face $5.3 billion in losses. A harsher scenario, with a 50 per cent NPL spike or a 7.0 per cent NPL ratio, projects $30.3 billion in losses across 26 banks. These figures remain below the $60 billion in net income generated by these banks in 2024, suggesting that profitability, not solvency, would take the hit. Damak notes that banks' liquidity and conservative investment portfolios — dominated by high-quality fixed-income assets comprising 20-25% of total assets — further mitigate risks. While the overall outlook is positive, vulnerabilities exist. Qatari banks, with significant net external debt, are more exposed to capital outflows, though government support, backed by Qatar's $475 billion sovereign wealth fund (per Sovereign Wealth Fund Institute), reduces systemic risks. Saudi banks, critical to financing Vision 2030's $1.25 trillion in projects, could face constraints if capital market access tightens. In contrast, UAE banks, with the region's strongest net external asset position, exhibit the highest resilience to hypothetical outflows of 50 per cent of nonresident interbank deposits and 30 per cent of nonresident deposits. Market volatility also poses risks to banks with exposure to capital markets or private-equity investments, though these activities contribute modestly to revenues. Margin lending, tied to declining asset valuations, is another concern, but conservative collateral coverage limits potential losses. The US Federal Reserve's expected 25-basis-point rate cut in 2025, likely mirrored by GCC central banks, should support bank margins. However, sharper rate reductions could compress profitability and slow lending growth. Historical precedent suggests GCC regulators may step in to ease pressures. During the Covid-19 crisis, forbearance measures like loan moratoriums helped banks navigate uncertainty, and similar interventions are anticipated if trade tensions escalate. The 90-day tariff pause for non-China countries, announced by the US, adds uncertainty, potentially undermining business and consumer confidence further. A full tariff implementation could deepen the economic fallout, with Goldman Sachs estimating a 0.5 per cent drag on global GDP.
Al Etihad
16-04-2025
- Business
- Al Etihad
UAE banks in a strong position to weather global volatility
16 Apr 2025 19:06 REDDY (ABU DHABI)Among all GCC banks, UAE banks have the strongest net external asset position in the region and therefore show the highest resilience to hypothetical capital outflows, triggered by the current volatility caused by the US imposition of tariffs, observed the S&P Global Ratings in an rising global trade tensions and weakening investor confidence, the S&P Global Ratings said: 'Intensifying global trade tensions are weighing on global credit conditions and threatening what has, until recently, been a favourable environment for most borrowers.' While the full imposition of paused US tariffs could have broad and deep economic consequences, Gulf banks are expected to weather the storm better than report identified market volatility and investor risk aversion as the most imminent threats to the region's banking systems. However, it said that the impact of capital market volatility is expected to remain manageable for banks, given that high-quality fixed-income instruments tend to dominate their investment capital outflows remain a risk, S&P conducted a series of hypothetical stress scenarios — including assumptions of losing 50% of non-resident interbank deposits and 30% of non-resident deposits. 'Most GCC banking systems appear capable of handling the hypothetical outflows,' the agency said. 'Assuming outflows of 50% of nonresident interbank deposits and 30% of nonresident deposits and haircuts of 20% on investments and 10% on due from banks, among other assumptions, the UAE banks are not only capable of handling the outflows but would also still have $186 billion of liquid assets that can be deployed in case the outflows exceed our stress scenario,' Dr. Mohamed Damak, Managing Director, Sector Lead Financial Institutions Middle East and Africa at S&P Global Ratings, told Aletihad . 'This surplus is the strongest among the six GCC countries banking systems,' Damak added. Qatar's banking system was seen as comparatively more vulnerable due to its 'significant net external debt position'. Nevertheless, 'the Qatari government's strong track record of support for the banks and its capacity to help them during times of stress mitigate the risks,' the report Saudi Arabia, the picture was more nuanced. 'While banks' actual position appears comfortable, if they are unable to continue to tap the capital markets, their capacity to continue financing Vision 2030 projects might diminish,' S&P at profitability, S&P said it expects only a modest rate cut from the US Federal Reserve and corresponding moves by GCC central banks, which will support GCC banks' profitability. But it warned that 'if policy rates drop more sharply, lower margins and potentially softer lending growth could weaken banks' profitability.'The analysis also highlighted risks stemming from falling oil prices. S&P revised its assumption to $65 per barrel for the rest of 2025, warning that further declines 'could mean lower economic growth in both the oil and non-oil sectors.'Even under adverse conditions, GCC banks appear well-prepared. GCC banks displayed strong asset-quality indicators prior to the start of the turmoil, with an average nonperforming loan (NPL) ratio of 2.9% for the region's top 45 banks at year-end 2024. 'Banks had also set aside provisions in excess of 150% of their stock of NPLs,' and the average return on assets was '1.7% at year-end 2024.' The average Tier 1 capital ratio stood at a healthy 17.2%. In its conclusion, S&P said: 'Even in our worst-case scenario, we still expect the shock to affect banks' profitability rather than their solvency.'
Khaleej Times
16-03-2025
- Business
- Khaleej Times
UAE: Market share of Islamic banks grows to 17.6%; which Shariah-friendly products are in demand?
Islamic banking is gaining currency in the UAE as Shariah-compliant financial institutions expand their product offerings to cater to a variety of clients. Industry executives say that the ethical, transparent, and risk-sharing nature of Islamic finance makes it appealing to a broad audience, including non-Muslim customers looking for sustainable and responsible financial products. In 2024, UAE Islamic banks grew 11.1 per cent compared to 9.2 per cent in the previous year for the overall banking system resulting in a slight increase in the market share of Islamic banks in the country to 17.6 per cent versus 17.3 per cent at the end of 2023, said Dr Mohamed Damak, managing director and global head of Islamic finance, S&P Global Ratings. 'From a performance perspective and based on the numbers disclosed by the top 7 conventional banks and top 4 Islamic banks, the profitability of both types of banks has been strong and comparable with return on assets (RoA) for conventional banks reaching 2.2 per cent versus 2.4 per cent for Islamic banks underpinned by a lower cost of risk for Islamic banks, as efficiency and margins were comparable,' said Damak. In early 2024, the Central Bank of the UAE ranked the country as the fourth-largest Islamic finance market worldwide. By the end of the first half of 2024, Fitch Ratings reported that Islamic financing accounted for 29 per cent of the UAE's total sector financing. Ibrahim Al Mheiri, head of Islamic banking, Mashreq, said the demand for Islamic finance products in the UAE continues to grow, driven by increasing customer preference for Sharia-compliant solutions and the country's commitment to positioning itself as a global Islamic hub. This momentum is expected to continue, with Islamic banks projected to outpace conventional banks in growth over the medium term. Factors such as supportive regulations, enhanced digital offerings, and the growing appeal of ethical banking are reinforcing this trend,' he said. Badis Shubailat, assistant vice president,and analyst at Moody's Ratings, said that UAE Islamic banks exhibited a higher return on asset performance last year relative to their conventional peers. Amongst Moody's rated entities, net income to tangible assets stood at 2.2 per cent for Islamic banks against 1.8 per cent for their conventional peers in 2024. 'UAE banks benefited from high rates during most of last year and strong operating conditions underpinned by sound business sentiment while ongoing structural reforms continued to safeguard the country's competitive edge,' said Shubailat. What products are growing? While demand for all types of Islamic financial products is increasing, Ibrahim Al Mheiri said there is strong demand for those that align with environmental, social and governance (ESG) principles. 'By integrating such principles, Islamic finance is attracting a new wave of socially conscious investors seeking ethical and impact-driven financial solutions. Key growth areas include the Green Sukuk, used to raise capital for environmentally friendly projects such as renewable energy and sustainable infrastructure, and sustainable investment options,' he said. Competitive returns Ray Vermam luxury broker at Eden Realty UAE, said Islamic banks in the UAE often provide comparable or slightly higher returns than conventional banks, particularly for fixed-term deposits. However, he said Islamic returns are not guaranteed, as they depend on profit-sharing (Sharia-compliant investments like trade/real estate), while conventional banks guarantee fixed interest. 'Risk-averse customers may prefer conventional stability, while ethical investors favour Islamic banks' alignment with religious principles.' Based on mortgage rates in 2024 for the UAE market, Vermam added that the difference between Islamic and conventional mortgages is minimal, Islamic banks in the UAE often provide slightly cheaper credit for fixed-term. 'While the rates are comparable, Islamic mortgages often have more transparent fee structures and typically don't charge prepayment penalties. Conventional mortgages may include additional costs like prepayment penalties and variable interest rates that could increase over time,' he added. Ibrahim Al Mheiri of Mashreq said in many cases, Islamic banks offer competitive and structured pricing that aligns with customers' financial needs while ensuring compliance with Shariah principles.
Khaleej Times
12-03-2025
- Business
- Khaleej Times
UAE banks, realty resilient as Russia-Ukraine ceasefire looms
The UAE banking sector will remain resilient amid potential Russia-Ukraine ceasefire and a subsequent likely softening of the country's residential real estate market, say analysts at S&P Global Ratings. Despite the significant influx of Russian nationals and capital into the UAE since the war began in 2022, S&P analysts suggest a ceasefire would not prompt an immediate reversal of these flows. Mohamed Damak, senior director and primary credit analyst at S&P Global, noted that ongoing political and economic uncertainties in Russia will likely encourage individuals and businesses to maintain financial footholds in the UAE. 'The UAE's business-friendly regulations, tax advantages, and stable environment remain compelling,' Damak stated in a report, which highlights the UAE's economic stability, robust liquidity buffers, and diversified non-oil growth as key pillars of resilience. A potential ceasefire following the US-initiated ongoing talks in Saudi Arabia is unlikely to trigger immediate Russian exodus, they said. Russian buyers have been pivotal in Dubai's real estate boom, ranking among the top foreign investors since 2021. Property prices in the UAE surged by double digits annually over this period, driven by high demand and limited supply. While a ceasefire could ease geopolitical pressures, S&P emphasises that the UAE's appeal as a safe haven and investment hub will endure. The UAE's broader economic health further insulates its financial sector. S&P projects real GDP growth at 3.4 per cent in 2024, accelerating to an average of 4.4 per cent between 2025 and 2027. This outlook hinges on a gradual easing of Opec+ oil production cuts and sustained expansion in non-oil sectors like tourism, logistics, and technology. With oil prices expected to stabilise near $70 per barrel, the nation's fiscal buffers and diversification efforts are poised to mitigate external shocks. A critical focus of S&P's analysis is the UAE banking system's liquidity strength. While deposit inflows from Russian entities surged post-2022 — exceeding historical norms in 2023 and 2024 — the sector's liquid assets stood at three times the value of these inflows as of November 2024. 'Even if deposit outflows occur, banks have more than enough liquidity to manage without destabilising operations,' Damak explained. He added that many Russians may retain UAE accounts for asset security, limiting net withdrawals. Though residential property markets show early signs of cooling, S&P downplays systemic risks. Direct bank lending to construction and real estate accounts for 14.4 per cent of total loans, but high demand and scarce supply — particularly in Dubai — are expected to cushion price declines. Notably, over 80 per cent of UAE real estate transactions are cash-based, reducing mortgage-related vulnerabilities. 'Population growth, investor appetite, and constrained supply underpin this market,' Damak said. 'Even if some Russian investors divest, absorption capacity remains strong.' Rated developers are similarly bolstered by healthy cash reserves, manageable debt, and solid revenue pipelines, ensuring resilience amid market fluctuations. Over the past three years, Russia migrant inflows, among other factors, have supported real estate demand in the UAE and the overall economic activity. 'We would not anticipate a significant disruption to the residential real estate sector, even if we were to see significant property divestments by Russians, given continuous strong demand and population growth. Dubai has witnessed an annual double-digit value increase since 2021, leading to significant capital gains for real estate owners. The market remains supportive as demand is still outpacing supply, a situation that we expect will continue in the next 12-18 months,' S&P analysts noted. They said high yields and capital gains along with asset security could be another reason for Russians to stay invested in the UAE. 'In our base case, we expect UAE GDP growth to accelerate from 2025 and as such see limited risks to banks' asset quality indicators. We also note that most real estate transactions are not financed by mortgages, which reduces banks' exposure to real estate price risks. 'We also believe rated real estate developers will remain resilient, even if their operating environment weakened, thanks to solid revenue backlogs, reduced leverage, strong cash flow generation, and good liquidity buffers. Overall, we expect the UAE banking system will continue to display strong asset quality indicators and that the UAE central bank's recent change to the provisioning rules will further increase non-performing loan coverage ratios — which were close to 100 per cent in 2024 — to levels comparable with some regional peers,' S&P analysts said.
Zawya
14-02-2025
- Business
- Zawya
ESG sukuk market surpasses $50bln, propelled by GCC bank issuance
The ESG sukuk market, which includes green and sustainability sukuk, marked a significant milestone by surpassing $50 billion in outstanding value by the end of 2024. Malaysia, Indonesia, and Saudi Arabia were the largest three markets, making up 67% of global market value. Issuances of ESG sukuk totalled $15.2 billion in 2024, reflecting moderated annual growth of 14.5%, according to data from the London Stock Exchange Group (LSEG). This marked the eighth consecutive year of record issuance since the inception of the ESG sukuk market in 2017. ESG sukuk accounted for 1.8% of total ESG bond issuance and 6.2% of total sukuk issuance. Sustainability sukuk, which also include sustainability-linked and social sukuk, nearly doubled in 2024, driven by a notable rise in issuances from financial institutions. These sukuk comprised 69% of total ESG sukuk issued, compared to 42% in 2023. Financial institutions contributed the largest share of ESG sukuk issued in 2024, at 55% of the total value. Around 93% of this came from GCC-based banks, which issued most of the largest sukuk during this period. GCC issuance driving momentum, boosted by expansion into new markets ESG sukuk issuance from GCC-based issuers has been the main driver of market growth in recent years, accounting for 58% of the global total in 2024. This growth was bolstered as ESG sukuk expanded into new markets, including Qatar and Kuwait, as more GCC corporates entered the market following COP28. This trend is expected to continue as the region remains committed to sustainability and investor demand for ESG-compliant financial instruments grows. 'We expect to see an acceleration of issuance if and when there is an acceleration in the climate transition of GCC issuers and renewable energy targets, as well as regulators offering incentives to take the sustainable issuance route,' said S&P Global Ratings Islamic Finance Head Mohamed Damak. Several GCC governments have been laying the groundwork for issuing ESG debt. Oman, Qatar, and Saudi Arabia each released sovereign sustainability or green financing frameworks in 2024. These frameworks establish guidelines and criteria for eligible projects, ensuring investors that the funds will be used for genuine environmental and social benefits, which is essential for issuing ESG debt instruments. (Reporting by Jinan Al Taitoon, CESGA, editing by Seban Scaria)
