GCC banks remain robust on strong capital buffers
dubai — GCC banks will resist weaker operating conditions, including a higher cost of risk and lower liquidity, to remain resilient on the back of sufficient capital buffers in 2017-2018, S&P Global Ratings said on Monday.
The ratings agency said while GCC banks’ financial profiles will continue to weaken in 2017-2018, most have built sufficient capital buffers to remain resilient to their weakened operating environment. “The three key risks that we foresee for GCC banks are a difficult operating environment, a higher cost of risk and lower liquidity.”
“The end of the commodities super-cycle has resulted in a significant decline in the economic prospects of the GCC region, implying lower growth opportunities for its banking systems and deteriorating liquidity,” said S&P global Ratings credit analyst Mohamed Damak. The end of the commodities boom has also increased the pressure on GCC banks’ asset quality and profitability indicators, said Damak.
Capitalisation
S&P said rated banks in the GCC continued to display good asset quality indicators, profitability and capitalisation in 2016 by global standards, albeit with signs of deterioration from 2015. “Over the past year, we have taken several negative rating actions on banks in the GCC. Most of these were concentrated in Bahrain, Oman and Saudi Arabia. While we have taken a few negative rating actions in other GCC countries, these were primarily for idiosyncratic reasons. Overall, 31 per cent of our rated banks in the GCC have negative outlooks or are on CreditWatch with negative implications,” the report said.
S&P said lending growth across the GCC would keep falling as the end of the commodities super-cycle had resulted in a significant slowdown of the GCC economies and reduced growth opportunities for their banking systems. “We assume that oil prices will stabilise at $50 per barrel in 2017 and 2018, and forecast unweighted average economic growth for the six GCC countries of 2.2 per cent in 2017 and 2.5 per cent in 2018.”
Moodys also expects the GCC banking sector quality to remain solid overall, with non-performing loans averaging three to four per cent of total assets. “While operating conditions for banks in the GCC remain challenging, the stabilisation of oil prices — albeit at a low level — and resilient non-oil sectors will moderate pressures on the banking sector from slowing economic growth, fiscal reforms and spending cuts,” it said in a report. “We expect new problemloan
The three key risks that we foresee for GCC banks are a difficult operating environment, a higher cost of risk and lower liquidity S&P Global Ratings
formation and increased loan restructurings due to sluggish economic activity and tightening liquidity. Certain sectors, particularly contracting, construction, real estate, retail and SMEs [small and medium enterprises] will be more affected,” Moodys said in a report.
According to Fitch Ratings, low oil prices continue to pressure bank liquidity and are also taking their toll on asset quality and earnings for banks in GCC countries.
In its 2017 Sector Outlook for GCC, the credit rating agency said banks remains negative as weaker economic growth will feed through to credit fundamentals. It said the slow oil price recovery is affecting banks in all GCC countries, where about 70 per cent of GDP is driven, directly or indirectly, by oil revenue.
The S&P report noted that growth in lending to the private sector halved to five per cent on average as of September 30, 2016, compared with 10 per cent in 2015.
Spending cuts
S&P expects this situation to continue in 2017-2018 as the government’s policy response to lower oil prices continues to take the form of spending cuts and the postponement of infrastructure projects.
“Under our base-case scenario, we expect private sector lending growth to reach five to seven per cent on average for the banking systems of the six GCC countries for 2017-2018, supported by strategic initiatives such as the Dubai Expo 2020, the World Cup 2022 in Qatar and the ongoing increase in government spending in Kuwait,” said the report.
The ratings agency noted that GCC banks continued to display strong capitalisation by international standards, with an unweighted average S&P Global Ratings risk-adjusted capital ratio of 11.8 per cent at year-end 2015. However, capitalisation has dropped over the past two years, from an average of 12.5 per cent at year-end 2013, as rapid growth of financing has not been matched by additional capital raisings or conservative dividend payout ratios.
— issacjohn@khaleejtimes.com