Oil price weakness is slowing economic growth in the Gulf region and this is taking its toll on bank liquidity and earnings, according to Fitch Ratings.
The ratings agency said the 2016 outlook for GCC banks is negative as around 70 percent of the GCC's GDP is driven, direct or indirectly, by oil.
Fitch said it forecasts slower economic growth for most GCC member countries in 2016. Kuwait is an exception where growth of 3.5 percent will be supported by strong public spending.
The agency said it expects a notable economic slowdown in Saudi Arabia, where it forecasts GDP growth falling to 1.9 percent in 2016 from 4 percent this year, Qatar (3.7 percent from 4.3 percent) and Oman (2.7 percent from 3.4 percent). A modest downturn is forecast for Bahrain and Abu Dhabi.
Fitch said 16 percent of ratings assigned to GCC banks are on negative outlook, with the bulk of these concentrated in Saudi Arabia.
"GCC bank ratings are largely driven by sovereign support because enactment of resolution legislation is a long way off and, in our opinion, these countries still have strong ability and propensity to support their banking systems," Fitch said in a statement.
It said performance indicators are likely to come under pressure across the region, impacted by lower credit demand and rising funding costs, adding that banks are and will remain profitable.
Fitch added that regional loan growth is still strong, averaging 13 percent in the first half of 2015, with the exception of Kuwait where credit expansion hovered between 5-7 percent in recent years.
Asset quality indicators hold up well in most countrieswith impaired loans averaging 3 percent of total loans at end-June.
Loan quality varies across countries - Saudi Arabia's banks report impaired loan ratios of 1 percent, well below 4 percent for banks in Bahrain and UAE, but reserve coverage is ample in the region.
"We expect capital levels to remain sound for rated GCC banks. The biggest threat to loss absorption capacity is, in our view, single-name exposure risk, but we are not aware of any new significant problem loans at our rated banks," Fitch said.For all the latest business news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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