Gulf banks to benefit from financial buffers

Gulf banks are expected to benefit from an uptick in the regional economy next year, according to Moody’s. The credit ratings agency said the outlook for GCC banks was stable — reflecting strong financial fundamentals, particularly in the largest banking systems. Still, fiscal and geopolitical challenges remain for some economies in the Gulf, it said in a report released on Wednesday. It forecasts that real GDP growth in the region will pick up slightly to around 2 percent in 2018 from no growth in 2017, as oil prices stabilize between $50 and $60 a barrel. “Although fiscal consolidation efforts in the region will persist, key regional infrastructure projects, such as UAE Expo 2020, World Cup Qatar 2022 and the Saudi National Transformation Program will support capital spending and credit growth which should expand by 5 percent in 2018,” Moody’s said. Low cost and stable funding, combined with elevated liquidity buffers will remain a credit strength of GCC banks. In 2017, governments injected liquidity from international debt issuances, thereby easing a lengthy funding squeeze which had stemmed from low oil prices. “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, a vice president and senior credit officer at Moody’s. “Nonetheless, fiscal and geopolitical risks pose challenges in Qatar, Oman and Bahrain.” Individually, in the UAE, Saudi Arabia and Kuwait, which account for around three quarters of GCC banking assets, the outlook is stable. However Bahrain and Oman are more weakly positioned. In Qatar, a diplomatic row with several other GCC members has severely impacted trade and tourism, putting pressure on banks’ loan quality, Moody’s said. Problem loans for the region’s banks are expected to increase next year following sluggish economic activity in 2017, and banks remain vulnerable to high borrower and sector loan concentrations.