Low oil prices continue to pressure bank liquidity and are also taking their toll on asset quality and earnings for banks in Gulf Cooperation Council (GCC) countries, Fitch Ratings says in a report released today.
Fitch’s sector outlook for GCC banks remains negative as weaker economic growth will feed through to credit fundamentals.
The slow oil price recovery affects banks in all GCC countries, where about 70 per cent of GDP is driven, directly or indirectly, by oil revenue, Fitch says. It forecasts Brent crude oil will average $45 a barrel in 2017.
“Lower oil prices have put significant pressure on the fiscal and external positions of all GCC sovereigns and governments are cutting spending and looking to raise additional revenue in response,”Fitch says. “Governments will be more selective with new large infrastructure projects, but we expect non-oil growth rates to pick up in 2017 as GCC economies overcome the initial shock of government cutbacks.
“Nevertheless, the pressure on governments and subdued economic growth negatively affect banks’ credit profiles,” Fitch adds. “Government deposits in banks have been shrinking or growing more slowly. Deposit and interbank rates have increased and banks have issued more debt and tapped the international syndicated loan market. Liquidity is still comfortable, but this tightening is likely to put pressure on loan growth, especially in Oman, Qatar and Saudi Arabia.”
Fitch says it expects asset-quality to decline slightly in 2017 as lower government spending and GDP growth affects the loan portfolios. Affordability will come under pressure as borrowers will have to cope with government measures to address fiscal deficits, which will raise utility and petrol prices, and introduce taxes. The loan books are very concentrated, with large single-name exposures, and high sector concentrations, particularly to real estate and contracting.
“Profitability will be affected by lower economic growth with dampening transactions and lending activity,” Fitch adds. “Higher funding costs will also have an effect. We believe conventional, non-Islamic banks will feel the funding pressure more than Islamic peers. However, the deterioration in profitability should be moderate in light of positive GDP growth and banks’ ability to reprice their loan books in a rising interest-rate environment.”
Fitch says prolonged low oil prices weaken the ability of GCC sovereigns to support the banking sector, although there is no change in their willingness to do so.
“This puts pressure on some of the bank ratings, particularly in Saudi Arabia and Oman,” Fitch adds. “Of the ratings assigned to GCC banks, 30 per cent are on negative outlook, hence the ratings outlook for the sector is also negative.”
For further information, see 2017 Outlook: Gulf Cooperation Council Banks published today and available at www.fitchratings.com or by clicking the link.
Contact Redmond Ramsdale, Senior Director, Financial Institutions +971 4424 1202 or Cynthia Chan, Head of Fitch Wire, Credit Policy Group, +44 20 3530 1655