News / Middle East

    Oil Price Squeeze Spreads to Gulf Region's Banks

    FILE - An oil pump works in the Persian Gulf desert oil field of Sakhir, Bahrain.
    FILE - An oil pump works in the Persian Gulf desert oil field of Sakhir, Bahrain.

    Low oil prices are forcing Gulf states to borrow to prop up their economies and are now taking their toll on the region's banks, too, complicating their efforts to raise capital required by regulators.

    The impact of crude's fall from more than $100 to below $30 a barrel in less than 18 months has already been felt by Middle Eastern countries dependent upon oil and gas revenue. They have had to borrow to prop up their economies.

    International investors have been avoiding the Gulf region's debt in recent months as a result, concerned about slower economic growth and substantial budget deficits.

    This has had an indirect effect on banks from Doha to Muscat, with the ensuing slump in stock prices and bond market volatility making it impossible for them to raise new capital so far this year. The situation is unlikely to ease anytime soon, because they will have to compete with governments needing to borrow billions of dollars to pay their bills.

    A dozen of the region's banks have announced capital-raising plans as they try to top up reserves after years of lending growth and meet local regulatory requirements. But these plans are now on ice, and Gulf banks have to decide whether to attempt to borrow at a higher cost or hold out and risk falling short of more stringent regulatory requirements set to come into force over the next three years.

    Local investors

    Another potential complication is that the flight of international buyers means banks will have to turn to local investors to buy their debt or equity. The problem here is that banks themselves are the largest regional debt investors.

    Gulf banks reinforced their capital buffers in the wake of the global financial crisis, so they are not in any imminent danger, according to bankers and analysts.

    However, they don't have the same funds to deploy as before, because Gulf governments have withdrawn some of their deposits to bridge budget shortfalls, which, as in Europe during the eurozone crisis, has exposed the interlinked relationship between governments and banks when bond markets fall.

    FILE - A view of Qatar National Bank's head office building in Doha.
    FILE - A view of Qatar National Bank's head office building in Doha.

    The trend is perhaps most prevalent in Qatar, where half its commercial lenders have announced capital plans, including the largest conventional and Islamic banks, respectively Qatar National Bank and Qatar Islamic Bank (QIB).

    "Market volatility has absolutely impacted plans for raising capital-boosting sukuk [Islamic bonds], but we are in a good position," Sheikh Jassim bin Hamad al-Thani, chairman of QIB, told Reuters at the bank's annual general meeting.

    QIB's total capital adequacy ratio (CAR) — a key indicator of its health — stood at 14.1 percent at the end of December, above Qatar's minimum requirement of 12.5 percent, even though its total lending jumped 46.1 percent in 2015.

    Although Basel III's core equity minimum is 7 percent, rising to 9.5 for the biggest global banks, most countries have set levels well above this, with Kuwait requiring 13 percent.

    But further increases are due, which would eliminate the bank's room for maneuver. The 15.125 percent minimum CAR set by Oman for 2019 would put most lenders there below or close to the limit at current capital levels.

    Pricing gulf

    Gulf secondary bond markets have been particularly volatile since the start of the year, with the yields on perpetual bonds issued by banks to boost their capital widening significantly as prices have fallen.

    This has forced high-net-worth individuals and private banks, traditionally major holders of perpetual bonds, to sell and will discourage them from buying back in, Ram Mohan Nataraja, portfolio manager at Invest AD, said.

    "The usual latent demand will also be much lower, given the overall volatile market conditions," he added.

    Although the relative illiquidity of these instruments accentuates such moves, they are generally considered riskier investments than regular bank bonds, and this was apparent in some of their recent price movements.

    Burgan Bank, Kuwait's third-largest lender by assets, sold perpetual bonds in September 2014 with a 7.25 percent coupon. These yielded 9.476 percent on January 11, before spiking to 11.525 percent on February 3.

    Even National Bank of Kuwait, which boasts one of the highest credit ratings of any Gulf bank, saw trading on its 5.75 percent bond issued in April 2015 jump from 5.92 percent at the start of the year to 7.27 percent on January 22.

    These moves suggest that enticing investors to buy new capital-boosting bonds will require banks to pay higher, more attractive coupons, something that will grate with Gulf bond issuers, who are traditionally regarded as extremely price-sensitive.

    FILE - Investors watch a monitor at the Dubai Financial Market.
    FILE - Investors watch a monitor at the Dubai Financial Market.

    Price vs. pride

    But limited options mean price is likely to trump pride. Slumping stock markets — Dubai's exchange dropped 39 percent between mid-July and mid-January, while Saudi Arabia's index is down 10.1 percent year-to-date —means equity investors would be loathe to plough money into rights issues.

    So-called contingent-capital bonds have never been sold in the Middle East, while convertible bonds are also a rarity.

    And while retaining earnings would give bank reserves a minor lift, it would cut into shareholder dividend payments which are already in the sights of local regulators.

    The United Arab Emirates central bank told its lenders to get approval before disclosing payouts for 2015, while Oman's regulator warned it could intervene on dividends to support capital ratios.

    Banks seem poised to wait for better markets to place capital-boosting bonds and sukuk, according to bankers, although time is limited.

    Saudi Arabia, Qatar and Oman are among the countries expected to issue bonds and the start of the holy month of Ramadan in June may mark the start of a three-month market shutdown for the Middle East's long summer break.

    You May Like

    US-Russia Tensions Complicate Syria War

    With a shared enemy and opposing allies, Russia and the US are working to avoid confrontation

    Video Re-opening Old Wounds in Beirut's Bullet-riddled Yellow House

    Built in neo-Ottoman style in 1920s, it is set to be re-opened in Sept. as ‘memory museum’ - bullet-riddled walls and bunkered positions overlooking city’s notorious ‘Green Line’ maintained for posterity

    Cambodian-Americans Lobby for Human Rights Resolution

    Resolution condemns all forms of political violence in Cambodia, urges Cambodian government to end human rights violations, calls for respect of press freedom

    This forum has been closed.
    There are no comments in this forum. Be first and add one

    Featured Videos

    Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
    Brexit Vote Plunges Global Markets Into Uncharted Territoryi
    June 24, 2016 9:38 PM
    British voters plunged global markets into unknown territory after they voted Thursday to leave the European Union. The results of the Brexit vote, the term coined to describe the referendum, caught many off guard. Analysts say the resulting volatility could last for weeks, perhaps longer. Mil Arcega reports.

    Video Brexit Vote Plunges Global Markets Into Uncharted Territory

    British voters plunged global markets into unknown territory after they voted Thursday to leave the European Union. The results of the Brexit vote, the term coined to describe the referendum, caught many off guard. Analysts say the resulting volatility could last for weeks, perhaps longer. Mil Arcega reports.

    Video Orlando Shooting Changes Debate on Gun Control

    It’s been nearly two weeks since the largest mass shooting ever in the United States. Despite public calls for tighter gun control laws, Congress is at an impasse. Democratic lawmakers resorted to a 1960s civil rights tactic to portray their frustration. VOA’s Carolyn Presutti explains how the Orlando, Florida shooting is changing the debate.

    Video Tunisian Fishing Town Searches for Jobs, Local Development Solutions

    As the European Union tries to come to grips with its migrant crisis, some newcomers are leaving voluntarily. But those returning to their home countries face an uncertain future.  Five years after Tunisia's revolution, the tiny North African country is struggling with unrest, soaring unemployment and plummeting growth. From the southern Tunisian fishing town of Zarzis, Lisa Bryant takes a look for VOA at a search for local solutions.

    Video 'American Troops' in Russia Despite Tensions

    Historic battle re-enactment is a niche hobby with a fair number of adherents in Russia where past military victories are played-up by the Kremlin as a show of national strength. But, one group of World War II re-enactors in Moscow has the rare distinction of choosing to play western ally troops. VOA's Daniel Schearf explains.

    Video Experts: Very Few Killed in US Gun Violence Are Victims of Mass Shootings

    The deadly shooting at a Florida nightclub has reignited the debate in the U.S. over gun control. Although Congress doesn't provide government health agencies funds to study gun violence, public health experts say private research has helped them learn some things about the issue. VOA's Carol Pearson reports.

    Video Trump Unleashes Broadside Against Clinton to Try to Ease GOP Doubts

    Recent public opinion polls show Republican Donald Trump slipping behind Democrat Hillary Clinton in the presidential election matchup for November. Trump trails her both in fundraising and campaign organization, but he's intensifying his attacks on the former secretary of state. VOA National Correspondent Jim Malone reports.

    Video Muslim American Mayor Calls for Tolerance

    Syrian-born Mohamed Khairullah describes himself as "an American mayor who happens to be Muslim." As the three-term mayor of Prospect Park, New Jersey, he believes his town of 6,000 is an example of how ethnicity and religious beliefs should not determine a community's leadership. Ramon Taylor has this report from Prospect Park.

    Video Internal Rifts Over Syria Policy Could Be Headache for Next US President

    With the Obama administration showing little outward enthusiasm for adopting a more robust Syria policy, there is a strong likelihood that the internal discontent expressed by State Department employees will roll over to the next administration. VOA State Department correspondent Pam Dockins reports.

    Video Senegal to Park Colorful ‘Cars Rapide’ Permanently

    Brightly painted cars rapide are a hallmark of Dakar, offering residents a cheap way to get around the capital city since 1976. But the privately owned minibuses are scheduled to be parked for good in late 2018, as Ricci Shryock reports for VOA.

    Video Florida Gets $1 Million in Emergency Government Funding for Orlando

    The U.S. government has granted $1 million in emergency funding to the state of Florida to cover the costs linked to the June 12 massacre in Orlando. U.S. Attorney General Loretta Lynch announced the grant Tuesday in Orlando, where she met with survivors of the shooting attack that killed 49 people. Zlatica Hoke reports.

    Video How to Print Impossible Shapes with Metal

    3-D printing with metals is rapidly becoming more advanced. As printers become more affordable, the industry is partnering with universities to refine processes for manufacturing previously impossible things. A new 3-D printing lab aims to bring the new technology closer to everyday use. VOA's George Putic reports.

    Video Big Somali Community in Minnesota Observes Muslim Religious Feast

    Ramadan is widely observed in the north central US state of Minnesota, which a large Muslim community calls home. VOA Somali service reporter Mohmud Masadde files this report from Minneapolis, the state's biggest city.

    Special Report

    Adrift The Invisible African Diaspora