GCC banks’ stable outlook reflects improving operating conditions, says Moody’s

December 05, 2018

The outlook for the GCC banking systems remains stable, reflecting their improving operating conditions, weakening but still solid loan performance and strong capital, Moody’s Investors Service said in a report on Wednesday.

Moody’s 2019 outlook expressed the rating agency’s expectation of how banks’ creditworthiness will evolve over the next 12 to 18 months in the GCC.

“Current oil prices will support increased government spending, and stimulus packages such as the UAE’s Expo 2020, the Saudi National Transformation Plan and Qatar FIFA 2022, will underpin banks’ stable financial performance,” Nitish Bhojnagarwala, Moody’s vice president and senior credit officer said.

Moody’s said that a return to rising oil production after production cuts in 2017-2018 will drive GCC countries’ real gross domestic product growth next year to an average of around 3.3 per cent, from just one per cent in 2017, easing fiscal pressures as well as keep government spending plans on track.

Banks in Kuwait, UAE, Qatar and Saudi Arabia will remain resilient, while fiscal pressures will weigh on banks in Oman and Bahrain, where oil prices will remain below the fiscal break-even level, the ratings agency said.

‘Credit growth will recover as government spending underpins economic activity and spurs private-sector growth. Lending growth in 2019 will range from four per cent in Saudi Arabia to six-seven per cent in Kuwait, Oman and Bahrain. Lending to construction and real estate sectors will increase’, Moody’s said in its ‘Banks - Gulf Cooperation Council 2019 Outlook’ report.

It added that problem loans in the region will continue to rise due to the lagging effect of the economic slowdown in previous years. Moody’s expects non-performing loans to stand at a still good three per cent of total loans at the end of 2019.

‘The GCC banks will continue to exhibit large loss absorption buffers against sudden asset quality deterioration and show resilience under our low probability stress scenarios. Capital will stay broadly stable, benefitting from modest credit growth and stable bottom-line profitability’, the ratings agency said.

It further said that GCC banks’ profitability pressures are expected to ease, with net income to tangible assets remaining strong at around 1.5 per cent to 2.1 per cent. ‘Banks have adapted their cost base to the slowing economic environment, maintaining strong efficiency. Consolidation will ease competition and also alleviate some pressure on profitability’.

Moody’s noted that the governments’ willingness to support GCC banks remains high and their capacity to support is strong, with the exception of smaller GCC economies, such as Oman and Bahrain.