Majority of GCC banks’ ratings remain stable

4 December, 2017 12:00 AM printer

Dubai: Two-thirds of GCC bank ratings are on stable outlook with only about 30 per cent with negative outlook according to Fitch Ratings.

About half of the negative outlooks are driven by continued low oil prices, which weaken sovereign ability to provide support and rationalise government spending, ultimately affecting banks’ financial metrics. The other half is a consequence of Qatar’s dispute with some Arab countries, reports The Gulf News.

The 2018 sector outlook for GCC banks remains negative as weaker economic growth feeds through to credit fundamentals, particularly credit growth. As a result, asset-quality metrics will deteriorate slightly. Nevertheless, liquidity will improve further from the tighter conditions seen in 2015 and 2016, with government issuance and lower loan growth. Oil generates about 60 per cent of government revenue in the GCC. Oil price expectations indicate that the fiscal deficits will continue to be large in Saudi Arabia, Oman and Bahrain.

Negative GDP growth in 2017 (-0.1 per cent) due to oil output cuts is forecast to improve to mild growth of 1.5 per cent in 2018. However, with fiscal adjustments unlikely to be sufficient to close gaps in sovereign budgets in 2018, government spending — a major source of growth in the GCC region — will continue to be muted. Nevertheless, Fitch expects non-oil GDP to grow by 2 to 3 per cen tin 2018 and continue to be the main driver of growth.  

Fitch expects lending portfolios to season quicker with low loan growth, resulting in mild deterioration in impaired loans ratios. Deterioration in certain corporate segments, particularly contracting and SMEs, is filtering down to other segments, including retail. Credit concentration remains a key risk. High levels of reserve coverage are likely to be sufficient for GCC banks to meet their IFRS 9 requirements.

Muted GDP growth, low loan growth in the banking sector and more expensive, albeit improved, funding costs will continue to put pressure on banks’ lending and revenue in 2018. Nevertheless, GDP growth will be positive, banks have proved able to reprice their loan books, recent interest rate rises continue to filter through and banks are well placed to benefit from further interest rate rises due to high levels of non-remunerated deposits.

No Capital Concerns: “We expect capital levels to be largely unchanged in 2018 due to lower loan growth. Ratios are above international peers but buffers are only adequate given high concentration (single borrower and sector) and therefore event risk,” said Redmond Ramsdale, an analyst with Fitch Ratings.