Dubai: The liquidity squeeze experienced by banking sectors across the region is expected to be further aggravated by increase in funding costs resulting from recent rating downgrades of sovereign funds followed by banks.
Credit ratings of all GCC countries have come under pressure following consistent decline in oil prices over the past two years. The International Monetary Fund (IMF) in its last Regional Economic Outlook has warned that deteriorating growth across the GCC region will impact profitability and asset quality of regional banks.
“Lower spending by the government and decline in government surpluses are adversely impacting both lending and deposits. While liquidity is shrinking, loan growth and asset quality are likely to decline in the short to medium term. But with strong capital positions supported by robust regulatory regimes are expected to keep banking systems healthy,” said Masood Ahmad, director of the IMF’s Middle East and Central Asia Department.
Last week, ratings agency Moody’s downgraded ratings of Saudi Arabia (to A3), Oman (to Baa1) and Bahrain (to Ba2). In early February S&P had downgraded short-term foreign- and local-currency sovereign credit ratings on Saudi Arabia to “A-/A-2” from “A+/A-1” with a stable outlook Bahrain to “BB/B” from “BBB-/A-3 and Oman to “BBB-/A-3” from “BBB+/A-2” with a stable outlook.
The sovereign rating downgrades were immediately reflected in the credit ratings of respective banking sectors of these countries. Moody’s last week completed the review for downgrade on the ratings of 11 Saudi banks initiated in March by downgrading the long-term deposit ratings of nine banks and confirming the ratings of two banks.
The rating of banks follows Moody’s downgrade of Saudi Arabia’s government issuer rating to A1 (stable) from Aa3. The rating downgrades of nine Saudi banks reflect, to differing degrees, a combination of the reduced fiscal capacity of the Saudi government to provide support to the banks in times of stress and an assessment of each bank’s resilience to the weakening domestic operating environment, which Moody’s expects will dampen funding, asset quality and profitability in the coming quarters.
The nine banks are: SAMBA Financial Group (SAMBA) downgraded to A1 from Aa3, Banque Saudi Fransi (BSF) (A1 from Aa3), Saudi British Bank (SABB), Arab National Bank (ANB), Riyad Bank (Riyad), Saudi Hollandi Bank (SHB), Saudi Investment Bank (SAIB), Bank AlBilad (BAB) and Bank Al-Jazira (BAJ). Moody’s confirmed the deposit ratings of Al Rajhi Bank (ARB) and National Commercial Bank (NCB), reflecting the rating agency’s expectation of the resilience of the banks’ deposit ratings at their current levels to the aforementioned pressures.
In late March ratings agency S&P had lowered long-term counterparty credit ratings on Al Rajhi Bank, National Commercial Bank, Riyad Bank, Samba Financial Group and Saudi British Bank because of the heightened risks they face in a low oil price environment that has limited the ability of governments to spend. That may mean these banks will find it more expensive to borrow money.
“We expect credit conditions for Saudi banks will deteriorate through a correction cycle, leading to increased non-performing loans and credit losses, as well as a decline in profitability. Consequently, we think that the economic risks for banks based in Saudi Arabia have increased.” said Suha Urgan, an analyst with S&P explaining the rationale for the downgrade.
According to S&P, the drop in oil prices has a marked and lasting impact on Saudi Arabia’s fiscal and economic indicators, resulting in difficult operating conditions for the banking sector. Given the limited business sector diversification in the Saudi economy and the small number of large corporations, Saudi banks are exposed to structurally high concentration risk.
Credit ratings of Bahraini and Omani banks too have come under downgrades in the latest round of review from Moody’s. The ratings agency has downgraded to Ba2, from Ba1, the long-term local currency ratings of BBK, National Bank of Bahrain and Bahrain Development Bank. All ratings carry a negative outlook. The actions on the Bahraini banks reflect the weakening financial strength of the sovereign, as indicated by Moody’s downgrade of Bahrain’s government issuer rating to Ba2 negative from Ba1 Ratings under Review.
In Oman, Moody’s downgraded the long-term deposit ratings of BankMuscat (to Baa1 from A3), Oman Arab Bank (to Baa2 from Baa1) and Bank Dhofar (to Baa2 from Baa1) and confirming the Baa1 long-term deposit rating of HSBC Bank Oman. The rating agency has assigned a negative outlook to Bank Dhofar’s long-term ratings while the ratings of the three other banks carry a stable outlook.
