Dubai: Outlook for the Gulf Cooperation Council (GCC) banks look stable in the year ahead due to strong operating environment, but the prospects appear bleak for banks from rest of the Middle East and North Africa (Mena) region, according to global credit rating agency Moody’s
“The stable outlook for GCC banks is driven by strong operating conditions coupled with expansionary fiscal policies and continued infrastructure spending, which remain supportive of credit growth” said Khalid Howladar, Senior Credit Officer at Moody’s. “However, declining oil prices if prolonged at these levels will reduce fiscal surpluses, affect economic confidence and moderate growth expectations,” he said.
Moody’s analysts have forecast the Brent oil price to hover around $80-85/barrel in 2015, however, say that sustained oil prices below its forecast would eventually lead to a weakening of the overall supportive environment.
“In addition to public sector spending, improved consumer and business activity — particularly in the UAE and Saudi Arabia — will support solid GCC lending growth at an average level of around 10 per cent in 2015. In addition, the stabilisation of local real-estate markets will continue to be a key driver for lower provisioning expenses and higher profitability, particularly for some GCC banks. This will help banks’ asset quality improve,” Howladar said.
The deposit-based funding structure of almost all GCC banks will also remain a key credit strength, with customer deposits representing 60 per cent to 90 per cent of banks’ total liabilities, supporting banks’ liquidity and funding.
The rating agency warns that GCC banks’ high concentrations of loans to single borrowers and single sectors, sizeable related-party lending and a lack of transparency could increase banks’ exposure to event risks.
For the rest of the Mena region, Moody’s expects that operating conditions will remain challenging for banks, with subdued business growth and weak domestic confidence leading to slow credit demand.
“The negative outlook for the rest of the Mena region reflects more subdued credit growth and unsettled domestic environments, which translate into high credit risks,” says Constantinos Kypreos, Senior Credit Officer at Moody’s. “In addition the high exposure to low-rated government securities links non-GCC banks’ credit profiles to their respective sovereigns” he said.
While economic output will strengthen in all these countries to reach between 2.5 per cent and 4 per cent in 2015 (from an estimated average of 2.5 per cent in 2014), it will remain below pre-crisis historical averages of between 4.8 per cent and 7.6 per cent.
“Non-GCC regional banks continue to finance government deficits, crowding out the private sector, and maintain high exposure to low-rated sovereigns. In many cases, exposure to low-rated governments will continue to increase, often amounting to several times’ bank capital — we estimate this at 6.1 times for Egypt and 4.9 times for Lebanon as of June 2014,” Kypreos said.
Geopolitical risks are expected to weigh heavy on the performance of banks across Non-GCC banks across Mena region. In Lebanon and Jordan, the war in Syria and the spread of Daesh will continue to disrupt traditional trade routes and weigh on key sectors of the economies such as tourism.
Moreover, non-GCC Mena banks’ credit risks remain high as deteriorating loan quality is not always reflected in reported figures, especially for state-owned Egyptian and Tunisian lenders. Banks’ foreign expansion — into high risk Sub-Saharan Africa for Moroccan banks, and aggressive growth in other emerging markets for Lebanese banks — poses a further risk, according Moody’s analysts.
On the positive side, the rating agency notes that non-GCC Mena banks will continue to benefit from a deposit based funding structure supported by inflows of remittances from migrant workers,