More mergers and acquisitions are likely to be seen in the Islamic banking sector in the Gulf region, according to Fitch Ratings.
The ratings agency said its 2022 sector outlook for GCC Islamic banks is neutral, reflecting a modest economic recovery and higher oil prices.
In a new research note, Fitch said it expects continued profitability pressures on GCC-based Islamic banks.
It said asset quality is not expected to deteriorate sharply following the end of forbearance measures while capital buffers and liquidity are expected to remain stable and adequate for the risks.
“We expect further M&A activity in 2022 as many Islamic banks have weak franchises lacking strong competitive advantages, particularly in pricing, cost of funding and growth opportunities,” Fitch said.
“Asset quality, profitability and, potentially, capital pressures on these banks could lead to more tie-ups. M&A may also create new Islamic national or regional champions,” it added.
Negative outlooks and watches are mostly in Kuwait and Qatar. The rating watch negative on all rated Qatari Islamic banks reflects their increasing reliance on external funding and rapid asset growth, which may have moderately weakened the sovereign’s ability to support the banking system, if needed, Fitch said.
The negative outlook on all Kuwaiti Islamic banks reflects the negative outlook on the sovereign, in turn driven by near-term liquidity risk given the depletion of liquid assets in the absence of a debt law, it added.
Downgrades since 2015 have been predominantly linked to weaker sovereign ability to provide support to banks following weaker oil prices, rising government debt, and deterioration in fiscal and external balance sheets.
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