The 2016 outlook for Gulf Cooperation Council (GCC) banks is negative. Oil price weakness is slowing economic growth and this is taking its toll on bank liquidity and earnings, according to Fitch Ratings.
In a report released on Thursday, the global ratings agency said it expects Oman's GDP growth to slow to 2.7 per cent in 2016, against the 3.4 per cent growth estimated this year.
Fitch said that around 70 per cent of the GCC's GDP is driven, direct or indirectly, by oil and its 2016 forecast Brent oil price is US$55 per barrel.
Fitch forecast slower economic growth for most GCC member countries in 2016. Kuwait is an exception where growth of 3.5 per cent will be supported by strong public spending.
“We expect a notable economic slowdown in Saudi Arabia, where we forecast GDP growth falling to 1.9 per cent in 2016 (from four per cent in 2015), Qatar (2016 GDP growth at 3.7 per cent against 4.3 per cent in 2015) and Oman (2016 GDP growth at 2.7 per cent against 3.4 per cent in 2015). A modest downturn is forecast for Bahrain and Abu Dhabi,” Fitch Ratings said.
Fitch said that 16 per cent of its ratings assigned to GCC banks are on negative outlook, with the bulk of these concentrated in Saudi Arabia.
“GCC bank ratings are largely driven by sovereign support because enactment of resolution legislation is a long way off and, in our opinion, these countries still have strong ability and propensity to support their banking systems. The outlook for Saudi Arabia's sovereign rating is negative and the country's commodity dependence is much higher than for peers. Banking sector assets represent 70 per cent of GDP, which is low and we think the sector's standalone ability is high. But as the sovereign draws down foreign assets to finance its deficit, state ability to support banks may come under pressure,” Fitch said.
It said liquidity positions across the GCC banks are adequate but these are coming under pressure because public-sector deposits are falling, in line with oil price weakness. “Saudi Arabia and Oman started to tap the domestic capital markets in 2015, with take-up largely by domestic institutional investors. This has diverted liquidity away from the banks. Deposit outflows will result in higher bank reliance on more costly debt issuance and borrowings across the region.”
The report said that the banking performance indicators are likely to come under pressure across the region, impacted by lower credit demand and rising funding costs. “But the banks are and will remain profitable, achieving an average operating return on equity of 14 per cent the first half of 2015, driven by wide margins which range from two to 3.5 per cent.”
According to Fitch, regional loan growth is still strong, averaging 13 per cent during the first half of 2015, with the exception of Kuwait where credit expansion hovered between five to seven per cent in recent years.
“We expect capital levels to remain sound for rated GCC banks. The biggest threat to loss absorption capacity is, in our view, single-name exposure risk, but we are not aware of any new significant problem loans at our rated banks,” it added.
