Thursday 22, December 2016 by Nabilah Annuar

2017: An uncertain year for GCC banks

There are many issues that are currently facing banks in the region today—regulatory changes, tightening liquidity, asset quality, non-performing loans, operational efficiency, etc. Nevertheless, financial institutions in the GCC appear to remain resilient towards these pressures and relatively in a better position than most of its global peers.

Nevertheless, the 2017 outlook on the banking sector in the region is seeing a large mix of sentiments. Some have said that the market will be stable going forward as it will start to recover from initial economic shocks, however, this view is affected by the continuous substantial reliance on the oil and gas sector in certain economies that may affect an institution’s asset quality.

In a recent report by Moody’s, the firm stated that asset quality is likely to remain solid, with non-performing loan ratios to remain at three to four per cent in 2017. It pointed out that banks in the GCC still have high single borrower and sector concentrations. Despite the formation of new problem loans (due to slowing economic activity and tightening liquidity—particularly in the construction, real estate and the SMEs), the ongoing resolution of significant legacy exposures in some systems and better collateral will moderate the impact.

Moody’s expect profitability will remain sound, although it is likely to decline slightly as a result of slowing credit growth. Bank funding profiles are also likely to remain robust, anchored by stable deposits representing 75-90 per cent of non-equity funding, but it will remain pressured by decelerating deposit growth, which has slowed to 1.2 per cent on average across the GCC.

Lower oil revenues have resulted in decline in government deposits in banks. Interbank rates have increased and banks have issued more debt and tapped the international syndicated loan market. However, Moody’s believe that the bond and Sukuk issuances from Abu Dhabi, Oman, Qatar and Saudi Arabia governments have assisted in mitigating these funding pressures.

But the burden of black gold is something that cannot be escaped from so quickly.

In a more critical report of this situation, Fitch Ratings’ in its 2017 Sector Outlook for GCC points out that low oil prices continue to pressure bank liquidity, taking a toll on quality and earnings for GCC banks. Fitch’s outlook on the sector is negative as weaker economic growth will feed through to credit fundamentals. The slow oil price recovery is unescapably affecting banks in all GCC countries, where about 70 per cent of GDP is driven, directly or indirectly, by oil revenue.

Fitch forecasts oil prices to flat line in 2017 with Brent crude averaging $45 per barrel. 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. Governments are expected to be more selective with infrastructure projects, but non-oil growth rates are expected to pick up in 2017 as the region overcomes the initial shock of government cutbacks. Nevertheless, the pressure on governments and subdued economic growth continue to negatively affect the credit profiles of financial institutions.

Part of Moody’s positive outlook on the GCC banking sector is the likelihood of government willingness to provide support to banks in times of need—although they may be more selective as their fiscal capacities are under pressure. However, as pointed out by Fitch, prolonged low oil prices weaken the ability sovereigns to provide support. This puts pressure on some of the bank ratings, particularly in Saudi Arabia and Oman.

In spite of these many challenges, it remains exciting to see how, things pan out for GCC’s financial sector next year.