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GCC banks run the risk of a worsening operating environment that could directly undermine asset quality and profitability if the Iran conflict continues to escalate, Moody’s has said.
In its latest report, the ratings agency pointed out a protracted conflict could also potentially pressure capital buffers and negatively affect credit ratings of GCC banks in the process.
“In our baseline scenario, we expect limited solvency pressure, which will maintain capital broadly stable,” Moody’s said.
According to Moody’s, an extended disruption of the region’s oil and gas exports would weigh on business sentiment and the non-oil economy at large – where GCC banks extend credit – particularly in sectors such as trade, transportation, real estate and construction as well as tourism.
Oil prices jumped over 25% on Monday to their highest levels since mid-2022. Brent crude was trading at $107.39 per barrel at 0800 am GMT as the Iran war triggered a disruption in global energy supplies. Tankers have stopped transiting the Strait of Hormuz, a critical strip of waterway used by major oil exporters including the UAE, Saudi Arabia, Kuwait, Qatar, Iraq and Iran.
A lengthy disruption to energy trade flows, beyond its baseline scenario, could lead to weakening investor confidence and broader deteriorating macroeconomic conditions, raising the risk levels for banks.
“The primary risk transmission channel would be through banks’ operational and liquidity risks,” Moody’s said, adding that, despite some temporary outages in online banking platforms because of damaged facilities, banks are maintaining business continuity plans.
Liquidity concerns amid GCC banks could rise should the conflict last longer than its baseline scenario, Moody’s stated, adding that “systems with higher reliance on less stable and external funding would face greater refinancing risks.”
Historically, GCC banks have been largely funded by stable customer deposits, which account for around three quarters of non-equity liabilities.
“In addition, deposit concentrations to local governments and public-sector entities, albeit high, have shown a strong track record as stable depositors even in turbulent times - such as the oil crisis in 2015 and the COVID-19 outbreak - limiting the risk of deposits runoff,” Moody’s explained.
GCC banks hold ample liquidity buffers against such risk, with their core banking liquidity ranging between 13% and 23% of tangible banking assets, predominantly comprising cash and cash equivalents and highly rated government securities issued by their respective sovereigns, the rating agency noted.
(Writing by Bindu Rai, editing by Seban Scaria)
