The outlook for GCC banks remains stable, reflecting strong financial fundamentals in the region’s largest banking systems that provide resilience to profitability and loan quality challenged posed by slower economies, according to a new report from Moody’s Investors Services.
In the report, Moody’s forecasts that real GDP growth in the region will rise to approximately 2 percent in 2018, up from 0 percent in 2017, with oil prices stabilising at between $50 and $60 a barrel.
Although fiscal consolidation efforts are ongoing in the region, a number of large-scale projects – such as Dubai’s Expo 2020 and the Saudi National Transformation Program – will support capital spending and credit growth, which Moody’s believes will expand by 5 percent in 2018.
Additionally, Moody’s noted that bank’s capital levels will remain broadly stable and well above the Basel III minimum regulatory requirements. Couples with high loan-loss reserves, this provides banks with the capacity to absorb losses. Tangible Common Equity (TCE) rations will remain in the 11 to 16 percent range, while problem loan coverage across the region remains high at 95 percent.
The strength of GCC banks, Moody’s notes, will be low cost and stable deposit based funding, combined with elevated liquidity buffers. In 2017, government’s injected liquidity from international debt issuances, easing a long “funding squeeze” which stemmed from low oil prices.
"The strong financial fundamentals in the Gulf banking systems makes the industry more resilient to lower profitability and weaker loan quality issues," said Olivier Panis, a vice president and senior credit officer at Moody's. "Nonetheless, fiscal and geopolitical risks pose challenges in Qatar, Oman and Bahrain."
In the UAE, Saudi Arabia and Kuwait – which account for 75 percent of GCC banking assets, the outlook remains stable. Oman and Bahrain, however, are in a weaker position due to their fiscal position, while Qatar’s diplomatic row with other GCC members have put pressure on banks loan quality.
The Moody’s report added that problem loans for the region’s banks will edge higher in 2018, following sluggish economic activity in 2017, while banks remain vulnerable to high borrower and sector loan concentrations, in addition to uneven disclosure in the corporate sector.
Profitability will also decline slightly, as low credit growth weights on interest income, fees and commissions.
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