Dubai: Two-thirds of GCC bank ratings are on stable outlook with only about 30 per cent with negative outlook according to Fitch Ratings.

About half of the negative outlooks are driven by continued low oil prices, which weaken sovereign ability to provide support and rationalise government spending, ultimately affecting banks’ financial metrics. The other half is a consequence of Qatar’s dispute with some Arab countries.

The 2018 sector outlook for GCC banks remains negative as weaker economic growth feeds through to credit fundamentals, particularly credit growth. As a result, asset-quality metrics will deteriorate slightly. Nevertheless, liquidity will improve further from the tighter conditions seen in 2015 and 2016, with government issuance and lower loan growth.

Oil generates about 60 per cent of government revenue in the GCC. Oil price expectations indicate that the fiscal deficits will continue to be large in Saudi Arabia, Oman and Bahrain.

Negative GDP growth in 2017 (-0.1 per cent) due to oil output cuts is forecast to improve to mild growth of 1.5 per cent in 2018. However, with fiscal adjustments unlikely to be sufficient to close gaps in sovereign budgets in 2018, government spending — a major source of growth in the GCC region — will continue to be muted. Nevertheless, Fitch expects non-oil GDP to grow by 2 to 3 per cen tin 2018 and continue to be the main driver of growth.

Fitch expects lending portfolios to season quicker with low loan growth, resulting in mild deterioration in impaired loans ratios. Deterioration in certain corporate segments, particularly contracting and SMEs, is filtering down to other segments, including retail. Credit concentration remains a key risk. High levels of reserve coverage are likely to be sufficient for GCC banks to meet their IFRS 9 requirements.

Muted GDP growth, low loan growth in the banking sector and more expensive, albeit improved, funding costs will continue to put pressure on banks’ lending and revenue in 2018. Nevertheless, GDP growth will be positive, banks have proved able to reprice their loan books, recent interest rate rises continue to filter through and banks are well placed to benefit from further interest rate rises due to high levels of non-remunerated deposits. No Capital Concerns: “We expect capital levels to be largely unchanged in 2018 due to lower loan growth. Ratios are above international peers but buffers are only adequate given high concentration (single borrower and sector) and therefore event risk,” said Redmond Ramsdale, an analyst with Fitch Ratings.

Wealth funds

GCC banks traditionally enjoy high levels of sovereign support. Fitch does not expect any weakening of state support propensity in the GCC in 2018, including in Saudi Arabia, which has not adopted a bank resolution regime despite being a G20 member state. In many cases, the sovereigns (or their wealth funds and social insurance/pensions organisations) hold significant stakes in the banks and place substantial deposits with them.

Economic growth in the GCC is set to stay subdued in response to continued low oil prices (Fitch forecasts Brent crude to average $52.5 a barrel in 2017 and 2018, and $55/bbl in 2019). Real GDP growth has slowed in 2017 as a result of oil production cuts, in line with the Opec production cut agreement. Lower oil prices have put significant pressure on the fiscal and external positions of all GCC sovereigns and in response governments have cut spending and have started to raise additional revenue, including the introduction of VAT from 1 January 2018 and other excise duties. Government spending is a crucial support to economic and business activity in all GCC countries and Fitch expects non-oil growth rates to pick up again in 2018 as economies overcome the initial shock of government cutbacks.

Political risks are high in the region. The sizeable escalation of tensions between Qatar and Saudi Arabia, and the UAE has added considerable uncertainty to the region and affected investor confidence. A surge in mergers and acquisitions among banks in GCC countries is unlikely due to structural impediments, despite market conditions that appear conducive and numerous rumours about potential deals.