(MENAFN- The Peninsula) The Peninsula
The outlook for GCC banks is stable overall reflecting strong financial fundamentals, particularly in the largest banking systems, that provide resilience to profitability and loan quality challenges from slower economies. Fiscal and geopolitical risks pose challenges, however, continue to pose challenges for various countries, said Moody's Investors Service in a report yesterday.
Moody's forecasts that real GDP growth in the region will pick up slightly to around 2 percent in 2018 from ‘0' percent in 2017, as oil prices stabilise between $50 and $60 a barrel. Although fiscal consolidation efforts in the region will persist, key regional infrastructure projects, such as UAE Expo 2020, World Cup Qatar 2022 and the Saudi National Transformation Program will support capital spending and credit growth which should expand by 5 percent in 2018.
Banks' capital levels will remain broadly stable and well above Basel III minimum regulatory requirements, in a context of modest credit growth in 2018. Combined with high loan-loss reserves, this provides banks with strong loss-absorption capacity. Tangible Common Equity (TCE) ratios will remain broadly in the 11 percent-16 percent range and problem loan coverage, at around 95 percent plus across the region, is high. Low cost and stable deposit based funding, combined with elevated liquidity buffers will remain a credit strength of GCC banks.
In 2017, governments injected liquidity from international debt issuances, thereby easing a lengthy funding squeeze which had stemmed from low oil prices. 'The strong financial fundamentals in the Gulf banking systems makes the industry more resilient to lower profitability and weaker loan quality issues, said Olivier Panis, a Vice President and Senior Credit Officer at Moody's.
'Nonetheless, fiscal and geopolitical risks pose challenges in Qatar, Oman and Bahrain. Individually, in the UAE, Saudi Arabia and Kuwait, which account for around 75 percent of GCC banking assets, the outlook is stable. However Bahrain and Oman are more weakly positioned in respect to their fiscal position. In Qatar, a diplomatic row with several other GCC members has severely impacted trade and tourism, putting pressure on banks' loan quality. Problems loans for the region's banks will edge higher in 2018 following sluggish economic activity in 2017, and banks remain vulnerable to high borrower and sector loan concentrations, as well as uneven disclosure in the corporate sector.
Profitability will also decline slightly, albeit from high levels, as low credit growth will weigh on interest income and on fees and commissions. The report, 'Banks -- Gulf Cooperation Council; 2018 outlook, is now available on www.moodys.com. Moody's subscribers can access this report via the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.
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