Net earnings of Gulf banks are expected to slide as government spending slows due to a dive in oil revenues, ratings agency Standard & Poor's (S&P) said yesterday.

Growth in net income declined to 4 percent in the second quarter, compared to 7 percent in the first three months of the year and more than 10 percent in the previous three quarters, S&P said in a report based on a survey of 26 major Gulf banks. "We expect Gulf banks' net income growth to decline below 10 percent in 2015 and potentially slow further in 2016," the ratings agency said.

The "good" earnings in the first half were due in part to declining credit losses and a reduction in provisions or funds set aside for doubtful loans. "But, owing to the knock-on effects of lower oil prices on growth and asset quality, earnings could weaken over the next several quarters," S&P said. Low oil income has slowed government expenditures on which the private sector largely depends. World oil prices have dropped by more than 50 percent since June 2014. The International Monetary Fund (IMF) forecasts that will result in a $300 billion drop in revenues this year for the six Gulf Cooperation Council (GCC) states - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

Customer deposits also lost momentum in the first half of the year. The GCC banks increased customer deposits 6 percent in the first and second quarters of 2015, compared to more than 10 percent in the previous eight quarters, S&P said. Six of the 26 banks reported negative deposit growth in the second quarter while 10 posted a contraction in non-interest income in the first half. Other areas of weakness were a contraction in fees for loan origination, brokerage and capital market activities, it said.