Banking systems in Bahrain and Oman are more vulnerable to the recent drop in oil prices than those in the rest of GCC due to their highly oil-dependent economy where the budget breakeven price is significant, a report said.

On a positive note, both countries will benefit from disbursements from the GCC Development Fund providing $10 billion to each country over a 10-year period, which would offset any capital expenditure cuts and act as a key growth contributor, added the report “How Will Lower Oil Prices Affect Banks In 10 Oil-Exporting Countries?” from RatingsDirect, Standard & Poor’s Ratings Services.

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, Standard & Poor's Ratings Services has revised its price assumptions.

“We now expect Brent's price to stabilize around $55/bbl in 2015 and increase slightly to around $65/bbl in 2016,” the report said.

“While our base-case scenario assumes this drop will not significantly affect the performance of oil-exporting countries' banking systems, a few of them could suffer higher credit losses and lower liquidity. In particular, the banking systems of countries with low fiscal buffers, significant economic imbalances, and high dependence on oil-related bank deposits may come under pressure.”

Oil's price decline could affect the oil-exporting 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, according to Standard & Poor’s.

Fiscal buffers accumulated over the past years, as well as investment projects that are part of strategic initiatives, such the Dubai Expo 2020 and Qatar World Cup 2022, are also likely to remain insulated from the mounting pressure on government budgets, the report said.

Nevertheless, Standard & Poor's also believes that a drop in banking systems' loan growth and an increase in problem loans are likely to emerge.

Standard & Poor's believes low oil prices will result in decreased government revenues and exports, and will hamper banking systems' liquidity.

Banks in Qatar, Oman, and UAE display significant concentration in their funding profiles, with around 30 per cent-40 per cent of deposits coming from government and its related entities.  – TradeArabia News Service