Moody’s maintains stable outlook for Arabian Gulf banks thanks to resiliency

Lenders continue to eke out profit despite loan quality challenges in some countries.

Moody's says the outlook of Gulf banks is stable because the strong financial fundamentals of the Gulf banking systems. Mona Al Marzooqi / The National

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 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, that are projected to grow 5 per cent in 2018.

"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 Oman, Bahrain and Qatar faced higher challenges than the UAE, Saudi Arabia and Kuwait, which combined, account for 75 per cent of GCC banking assets, due to different factors.

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Oman and Bahrain suffer from weak financial buffers, while a Saudi-led boycott of Qatar has upped the pressure on its lender’s loan quality

Despite low credit growth, Gulf banks’ capital levels also will 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. However, their performance diverges between strong economies with financial buffers and weak economies 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.

“Problems 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.”