GCC banks maintain stable outlook

18 December 2014

Sovereign support gives confidence to regional lenders, says Fitch Ratings

Banks in the GCC have maintained a stable outlook on their long-term issuer default (IDR) ratings despite geopolitical tensions and the declining price of oil, says the US’ Fitch Ratings.

The agency says it has maintained a stable outlook for the industry due to the high level of sovereign support the sector receives.

Fitch Ratings also notes that problem loans have peaked within the GCC and impairment charges should continue to fall, leading to higher profitability.

The regional banking sector also enjoys strong capital levels and a substantial deposit base, according to the agency.

Within the Gulf, the only country to suffer from social unrest is Bahrain, but as yet the impact on the banking system is limited.

The decline in oil prices is not yet a major concern, but Fitch Ratings says it could “start to put some negative pressure on the sector outlooks in some of the smaller GCC countries”.

Government-sponsored infrastructure projects in the Gulf are a major source of growth for the economy and the banking sector. The schemes are mainly driven by the sovereigns’ oil and gas revenues and are part of government efforts to diversify away from the hydrocarbons industries.

Fitch says that despite a drop in oil prices, it does not expect GCC governments to halt their large infrastructure projects in 2015.

However, a protracted decline in oil prices could lead to weaker profits at GCC banks if governments do reduce investment. Fitch Ratings forecasts that pressure to reduce spending will be strongest in Bahrain, Oman and Saudi Arabia.

Any potential delays to infrastructure schemes and payments to contractors could also place pressure on banks’ revenues and asset quality.

Fitch Ratings says bank debt issuance will remain limited in the coming year, due to most lenders still having access to low-cost customer deposits.

The most active issuers are banks in the UAE that need to raise long-term money to fund projects.

“We do not expect any bank to rely on large debt issuance in 2015,” a report by the ratings agency said.

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