GCC bank asset quality to weaken
The banking sector outlook in the Gulf Cooperation Council (GCC) region for 2018 is negative, with asset-quality metrics likely to slightly deteriorate as credit growth slows due to weak economic growth, according to Fitch Ratings.
But liquidity appears less vulnerable than in recent years helped by government injections into the banking systems.
It is expected mild deterioration in impaired loan ratios as lower loan growth will cause lending portfolios to season more quickly. Deterioration in certain corporate segments, particularly contractors and SMEs, is already filtering into other segments, including retail. Credit concentration remains the key risk in the region. But reserve coverage is high and should be sufficient for GCC banks to meet IFRS 9 requirements to provision for expected credit losses.
Fitch forecasts subdued GDP growth for the region in 2018, albeit a slight improvement on 2017. Government spending, usually a major driver of growth, will be muted as sovereign budgets remain under pressure from low oil prices. Oil generates about 60 per cent of government revenue in the region.
Liquidity pressures have eased since the squeeze that affected much of the region in 2015-2016 after the slump in oil prices. Sovereign-related deposits withdrawn from banks have largely been replaced by government liquidity injections, financed by debt issuance. This year the boycott of Qatar by a number of Arab countries triggered a spate of withdrawals from the country's banks, but these too have been replaced, mainly by Qatari public-sector deposits - another example of government support for banking systems in the GCC region.
GCC banks' capital ratios are high by international standards and unlikely to change much in 2018, given lower loan growth. But the concentrated exposure in banks' loan books to individual sectors and borrowers make them more sensitive to event risk.
Fitch has Negative Outlooks on 30 per cent of GCC bank ratings. Around half are a consequence of the boycott of Qatar. The remainder are driven by continued low oil prices, which constrain government spending (affecting banks' financial metrics) and weaken sovereign ability to support banks.