Low oil prices continue to pressure bank liquidity and are also taking their toll on asset quality and earnings for banks in Gulf Cooperation Council (GCC) countries, according to Fitch Ratings.
In its 2017 Sector Outlook for GCC, the credit rating agency said banks remains negative as weaker economic growth will feed through to credit fundamentals. It said the slow oil price recovery is affecting banks in all GCC countries, where about 70 percent of GDP is driven, directly or indirectly, by oil revenue.
“We forecast oil prices to flatline in 2017 with Brent crude averaging $45 per barrel," the agency said in its report.
“Lower oil prices have put significant pressure on the fiscal and external positions of all GCC sovereigns and governments are cutting spending and looking to raise additional revenue in response.
"Governments will be more selective with new large infrastructure projects, but we expect non-oil growth rates to pick up in 2017 as GCC economies overcome the initial shock of government cutbacks.
“Nevertheless, the pressure on governments and subdued economic growth negatively affect banks' credit profiles."
Fitch said government deposits in banks have been shrinking or growing more slowly, while deposit and interbank rates have increased and banks have issued more debt and tapped the international syndicated loan market.
“Liquidity is still comfortable, but this tightening is likely to put pressure on loan growth, especially in Oman, Qatar and Saudi Arabia.
“We expect asset-quality metrics to decline slightly in 2017 as lower government spending and GDP growth affects the loan portfolios.
Affordability will come under pressure as borrowers will have to cope with government measures to address fiscal deficits, which will raise utility and petrol prices, and introduce taxes.
“The loan books are very concentrated, with large single-name exposures, and high sector concentrations, particularly to real estate and contracting. Profitability will be affected by lower economic growth with dampening transactions and lending activity. Higher funding costs will also have an effect.
“We believe conventional, non-Islamic banks will feel the funding pressure more than Islamic peers.
“However, the deterioration in profitability should be moderate in light of positive GDP growth and banks' ability to reprice their loan books in a rising interest-rate environment.
“Prolonged low oil prices also weaken the ability of GCC sovereigns to support the banking sector, although there is no change in their willingness to do so.
“This puts pressure on some of the bank ratings, particularly in Saudi Arabia and Oman. Of the ratings assigned to GCC banks, 30% are on Negative Outlook, hence the ratings outlook for the sector is also negative.
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