13 December, 2015

Fitch: Oil takes its toll on GCC banks, outlook negative

Oil price weakness is slowing economic growth and this is taking its toll on bank liquidity and earnings, says Fitch Ratings.

13 December 2015
LONDON: The 2016 outlook for Gulf Cooperation Council (GCC) banks is negative. Oil price weakness is slowing economic growth and this is taking its toll on bank liquidity and earnings, says Fitch Ratings.

Around 70 percent of the GCC's GDP is driven, direct or indirectly, by oil. Our 2016 forecast oil price is $55 per barrel (Brent).

Fitch 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.

Sixteen 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, these countries still have strong ability and propensity to support their banking systems.

Banking sector assets represent 70 percent of GDP, which is low and we think the sector's standalone ability is high. But as the sovereign draws down foreign assets to finance its deficit, state ability to support banks may come under pressure.

Liquidity positions across the banks are adequate but these are coming under pressure because public sector deposits are falling, in line with oil price weakness.

Saudi Arabia and Oman started to tap the domestic capital markets in 2015, with take-up largely by domestic institutional investors. This has diverted liquidity away from the banks. Deposit outflows will result in higher bank reliance on more costly debt issuance and borrowings across the region.

Performance indicators are likely to come under pressure across the region, impacted by lower credit demand and rising funding costs. But the banks are and will remain profitable, achieving an average operating return on equity of 14 percent in H1, 2015, driven by wide margins which range from 2 percent to 3.5 percent.

Regional loan growth is still strong, averaging 13 percent in H1, 2015, with the exception of Kuwait where credit expansion hovered between 5 percent and 7 percent in recent years.

Asset quality indicators hold up well in most countries. Impaired loans average 3 percent of total loans at end-June 2015.

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 the UAE, but reserve coverage is ample in the region.

"We expect capital levels to remain sound for rated GCC banks," Fitch stated, adding that the biggest threat to loss absorption capacity is, single-name exposure risk, "but we are not aware of any new significant problem loans at our rated banks."

© Arab News 2015