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* Lower oil prices to weigh on earnings
* Regulation, bad loans, property weakness also cast shadow
* UAE lenders likely to have strongest quarterly results
By Tom Arnold
DUBAI, April 7 (Reuters) - Lower oil prices are set to end a run of bumper earnings for banks in the Gulf, one of a number of headwinds as lenders report first quarter results.
While the steep fall in oil prices is a concern to banks, a more immediate impact may be felt from retail banking rules, bad loan worries and property sector weakness.
Lower oil revenues have yet to lead to a significant drying up of liquidity. Banks remain exposed if oil prices remain under pressure in the medium-term as deposits from the government, quasi-government bodies and national oil companies provide around 10 percent to 35 percent of their non-equity funding, according to Moody’s Investors Service.
“At the moment, local banks have been somewhat insulated as governments have huge reserves so can draw down from foreign reserves, foreign banks or local banks,” said Redmond Ramsdale, regional director of financial institutions at Fitch Ratings.
Banks in Saudi Arabia, home to the largest oil reserves in the Gulf, are naturally among the most exposed.
Chiradeep Ghosh, banking analyst at Bahraini investment bank SICO, said he expected “flattish growth” for the kingdom’s banks in the first quarter.
Riyad Bank, Saudi Arabia’s third-largest listed lender by assets, reported an 8.6 percent increase in its first-quarter net profit on Tuesday.
Appetite for retail credit will be curbed by Saudi mortgage rules introduced last November, capping the maximum loan-to-value ratio at 70 percent. Most banks previously extended mortgage loans around an 80 percent loan-to-value ratio.
Some banks are already grappling with a cap on retail fees, a move that has already dented earnings at Al Rajhi Bank , the kingdom’s second-largest lender, since its introduction last year.
Banks may also feel the pain from their exposure to troubled telecommunications firm Etihad Etisalat (Mobily), which amounts to about 14 billion riyals ($3.73 billion), according to estimates by Al Jazira Capital.
Lenders may set aside extra provisions, especially if they’re pressured by the kingdom’s regulator, which has been proactive in the past about making banks build safeguards.
Bank earnings in the United Arab Emirates are likely to be the strongest in the Gulf.
A strengthening domestic economy has meant banks have had to gradually set aside fewer provisions to cover bad debt. That process was boosted last month when Dubai World said it had gained 100 percent creditor approval for its $14.6 billion debt restructuring plan.
However, lower oil prices -- together with softness in the property and equities markets -- may ultimately require banks to reverse that downward trend, leading to additional provisions against a fresh wave of bad loans. It is unclear whether that trend may emerge in the first quarter.
In Qatar, results are likely to be dented by a slowing expansion in bank lending.
Lending growth in Qatar has been a significant factor in supporting bank profits in recent years as the state spends billions of dollars on infrastructure and preparations to host the soccer World Cup in 2022.
Qatar National Bank will report earnings on Wednesday.
In Kuwait, the benefits of a tumbling number of non-performing loans are likely to be offset by a slowdown in deposit growth, raising bank funding costs higher.
Banks in Oman and Bahrain are most vulnerable to a drop in oil prices as their respective governments share relatively high fiscal break-even oil prices and lower reserve levels. But it could take a couple more quarters for the more fragile economic environment to put the brakes on banks’ balance sheet growth. (Editing by Keith Weir)