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Dubai: The GCC banking sector is set for improved profitability, better asset quality and stable balance sheet strength in 2019, thanks to a better operating environment supported by higher government spending, higher oil prices and government stimulus packages, according to rating agency Moody’s.

Moody’s 2019 GCC banking sector outlook discusses how creditworthiness will evolve over the next 12 to 18 months in the region. “Current oil prices will support increased government spending, and stimulus packages such as UAE’s Expo 2020, the Saudi National Transformation Plan and Qatar FIFA 2022, will underpin banks’ stable financial performance,” said Nitish Bhojnagarwala, a Moody’s vice president and senior credit officer.

The outlook for 2019 projects banks in Kuwait, UAE, Qatar and Saudi Arabia will remain resilient, while fiscal pressures will weigh on banks in Oman and Bahrain, where oil prices will continue to remain below the fiscal break even level.

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In the UAE, loan performance is expected to gradually stabilise, with capital levels remain strong and profits improving slightly as a result of rising interest rates. Higher oil prices are expected to support stable deposit funding and liquidity.

For Saudi banks, Moody’s expects increased government spending to support the non-oil economy and asset risk to weaken marginally from a strong position with supportive capital buffers.

For Kuwaiti banks, government project spending and consumption will sustain non-oil growth. Profitability is expected to improve as margins widen and provisioning charges fall. In Oman and Bahrain, fiscal deterioration reduces the government’s capacity to support banks with deterioration in loan quality leading to higher problem loan formation. The rating agency expects profitability of both these banking sectors to deteriorate, due to higher loan loss provision charges.

Despite some divergence among countries, analysts said the overall loan performance will weaken but will largely remain solid, overall. Problem loans are expected to increase due to the lagging effect of the economic slowdown in previous years. Moody’s has projected non-performing loans (NPLs) to stand at a still solid 3 per cent of total loans at the end of 2019.

Improved loan performance and ability to reprice loans in a rising interest rate environment is expected to ease profitability pressures of GCC banks next year; however, slow loan growth is expected to keep profit growth modest.

Cost savings

Analysts said GCC banks in general have adapted their cost base to the slowing economic environment, maintaining strong efficiency. With interest rates expected to rise in line with US monetary policy tightening, as GCC currencies are pegged to the US dollar. According to Moody’s, higher interest rates will be broadly supportive of banks’ net interest margins, particularly in regions where low-cost demand deposits are high and loan re-pricing undertaken in previous quarters will ease pressure on margins as the benefits start to outweigh the higher cost of deposits and other funding.

“We expect an average return on assets of around 1.5 per cent for 2019, due to a modest pickup in lending and the benefits of loan re-pricing in a rising interest-rate environment. Efficiency will remain high and stable, but provisioning needs may lift moderately,” said Bhojnagarwala.

Credit growth is projected to recover as government spending boost economic activity and spur private-sector growth. Lending growth in 2019 is projected to range from 4 per cent in Saudi Arabia to 6 per cent to 7 per cent in Kuwait, Oman and Bahrain.

Moody’s said funding pressures on banks have reduced and are expected to remain stable next year. Current oil prices and continued international debt issuances by GCC sovereigns have reversed public-sector deposit outflows. Aggregate deposits from the public sector make up around 30 per cent of total deposits.

Strong capital positions of banks combined with sustained sovereign support, Moodys’ expects GCC banks are capable of withstanding sudden stress. GCC banks will continue to exhibit large loss absorption buffers against sudden asset quality deterioration and show resilience under our low probability stress scenarios.