GCC banks’ 2020 outlook stable amid resilient economic growth

Dubai: The 2020 outlook for Gulf Cooperation Council (GCC) banks is stable amid solid economic growth, banks’ strong capital buffers and substantial liquidity, according to Moody’s Investors Service.

The rating agency expects banks across GCC to maintain strong net interest margins compared with global peers, despite falling interest rates.

“The outlook for GCC banks remains stable supported by strong economic growth. Government spending programmes will push average non-hydrocarbon GDP growth to 2.6 per cent in 2020, providing favourable operating conditions for the region’s banks,” said Nitish Bhojnagarwala, Vice-President and Senior Credit Officer at Moody’s.

According to the rating agency, majority of GCC banking sectors have stable outlook supported by solid non-hydrocarbon GDP growth as a result of continued government spending, strong capital buffers and solid deposit-focused funding base supporting liquidity.

Moody’s outlook is stable for all GCC banking systems except Oman. The rating agency maintains a negative outlook for the Oman banking system, where asset quality is expected to weaken as lower oil prices have dented government spending, and constrained government finances likely limit banks’ access to funding and liquidity. Stability in UAE, Saudi Arabia, Qatar, Kuwait and Bahrain that accounts for 97 per cent of GCC rated banking assets will outweigh fiscal pressures in Oman.

Asset quality

Despite the slowing global growth and rising geopolitical tensions in the region that is likely to weaken business confidence in the region posing some downside risk to economic growth, Moody’s analysts do not expect any major downside risk to the banking sector. While loan performance is expected to weaken modestly, overall asset quality is expected to remain solid.

“New problem loans will form primarily in the slowing construction and real-estate sector. We expect non-performing loans to stand at a moderate 3.5 per cent of total loans by the end of 2020, from an estimated 3.3 per cent in 2019,” said Bhojnagarwala.

Strong capitalisation levels across GCC is seen by the rating agency as a considerable source of strength for GCC banks and it is projected to remain stable. “We expect average tangible common equity of around 16 per cent of risk-weighted assets for 2020, a sufficient buffer to withstand sudden stress,” said Bhojnagarwala.

Profitability and liquidity

Moody’s expects declining interest rates to pressure banks’ net interest margins, but margins are projected to remain strong compared with global peers.

Profitability pressures are expected to increase as a small rise in problem loans drives loan-loss provisioning costs higher. The rating agency expects average return on assets to dip slightly to around 1.7 per cent for 2020 from an estimated 1.8 per cent for 2019.

Continued international debt issuances by GCC sovereigns will bolster inflows of domestic deposits, while credit growth will be sluggish keeping funding demand low. Liquid assets are forecast to remain substantial around 31 per cent of total assets for 2020 and well above levels of confidence-sensitive market funding. While liquidity coverage ratios are seeing remaining very high with very high levels of government support in the event of a crisis, Moody’s analysts expect GCC governments’ ability to support banks remains very strong with the exception of Bahrain and Oman, where fiscal pressures are more pronounced.