Moody’s maintains stable outlook for Gulf banks

The outlook for Arabian Gulf banks remains stable due to their resilience in tough economic conditions, as lenders continue to eke out profits despite loan quality challenges in some economies, Moody’s Investors Service said.

The credit rating agency, which is forecasting the region will return to growth next year and expand at an aggregate pace of 2 per cent, has identified infrastructure projects like Dubai’s Expo 2020 as catalysts for capital spending and credit growth.

“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, vice president and senior credit officer at Moody’s. “Nonetheless, fiscal and geopolitical risks pose challenges in Qatar, Oman and Bahrain.”

Moody’s said these three countries faced bigger challenges than the UAE, Saudi Arabia and Kuwait – which combined account for 75 per cent of GCC banking assets – due to different factors.

Oman and Bahrain suffer from weak financial buffers, it said. The Saudi-led boycott of Qatar, meanwhile, has upped the pressure on its lenders’ loan quality.

Despite low credit growth, Gulf banks’ capital levels will also be stable, exceeding minimum regulatory requirements in the Basel III banking standards that are being phased in.

“Low cost and stable deposit-based funding, combined with elevated liquidity buffers, will remain a credit strength of GCC banks,” Moody’s said. “In 2017, governments injected liquidity from international debt issuances, thereby easing a lengthy funding squeeze which had stemmed from low oil prices.”

Gulf banks’ profitability has been squeezed over the last several years because of an economic slowdown sparked by a collapse in oil prices. But there is a performance divergence between strong economies with financial buffers, and weak ones with less wealth.

Loan asset quality has also suffered, particularly from lending to small- and medium-sized enterprises, which prompted some banks to increase their provisions to cover bad debt.

“Problem 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,” Moody’s said.

“Profitability will also decline slightly, albeit from high levels, as low credit growth will weigh on interest income and on fees and commissions.”

The strong financial fundamentals in the Gulf banking systems makes the industry more resilient to lower profitability OLIVIER PANIS Vice president, Moody’s