Islamic Finance

Moody's changes outlook on five GCC banking systems to negative

DIFC - Dubai, April 02, 2020 -- Moody’s has changed its outlook to negative from stable for the banking systems of Saudi Arabia, United Arab Emirates, Kuwait, Qatar and Bahrain and maintained its negative outlook on the banking system of Oman because of the oil price collapse and coronavirus outbreak, Moody’s Investors Service said in a report published today.

Oil prices are substantially below those required to balance the budgets of Gulf Cooperation Council (GCC) states. This will weigh on government revenues and lead to spending cutbacks that will rein back growth in the non-oil sectors of the economy where the banks do most of their business. Additionally, banks will face a reduced flow of deposits as falling oil prices squeeze government revenues – the largest depositor in most GCC banking systems.

Furthermore, restrictions on businesses and households’ activities to slow the spread of the coronavirus will place severe pressure on economic activity and put many borrowers under stress. Moody’s expects defaults on bank loans to increase and loan-loss provisioning for doubtful loans to rise. A combination of higher loan loss provisions and slower lending growth will erode the banks’ normally solid profitability.

GCC governments and central banks have put in place far-reaching support measures designed to shore up the financial position of households and businesses, but the rating agency does not expect these will wholly offset the adverse impact of the coronavirus-induced shutdown. It expects the hotel and restaurant, airline, automotive, trade, tourism and retail sectors to be the most severely hit, and that small and mid-sized enterprises will be the most vulnerable.

However, in most GCC banking systems, capital buffers are substantial, providing a solid base to absorb unexpected losses. Most banking systems also benefit from a high to very high likelihood of government support if needed.

In the GCC, economic growth in Saudi Arabia, UAE, Bahrain and Oman will be hardest hit, with a negative non-hydrocarbon real GDP growth rate in 2020. At the same time, Moody’s expects economic growth to be flat in Qatar while Kuwait will grow at around 2%.

Below are the main drivers for Moody’s actions on the Gulf banking systems:

The outlook on the Saudi banking system has been changed to negative from stable because of the deteriorating operating environment for banks, caused by the dual blow of a sharp drop in oil prices and the coronavirus outbreak. Moody’s expects slowing economic activity and disruption caused by the pandemic to weigh on the banks' asset quality and profitability, and their strong funding profile will be pressured as the drop in the oil price constrains government coffers. Additionally, lower interest rates in the kingdom will put further pressure on banks’ profitability.

The outlook for the Kuwaiti banking system has been changed to negative from stable to reflect the economic headwinds caused by the disruption to business activity as a result of the coronavirus outbreak and reduced government revenue due to the sudden drop in oil prices. Kuwait banks hold ample capital and liquidity and are well able to absorb unexpected losses. But strong measures to curb the spread of the coronavirus will weigh on business activity and Moody’s expects deteriorating operating conditions to weaken banks’ loan portfolios and lead to rising loan-loss provisions. Together with lower loan growth, this will weigh on the banks’ profitability.

The outlook for the Qatari banking system has been changed to negative from stable to reflect the deteriorating operating environment for banks because of the coronavirus pandemic and hydrocarbon price collapse. Qatari banks are well capitalised and profitable, and they are highly likely to benefit from government support if required. Nevertheless, Moody’s expects the severe disruption to civilian life and to business activities to lead to rising problem loans and weaker profitability. Additionally, liquidity pressures in the banking system will increase as banks’ reliance on foreign funding will increase over the outlook period.

The outlook for the UAE banking system has been changed to negative from stable to reflect the expectation of weakening loan quality and profitability at UAE banks and tighter access to funding as the coronavirus outbreak hits the economy. The UAE economy is particularly exposed given the importance of non-oil sectors to the economic activity, including tourism, transportation, trade and real estate sectors. Low oil prices will reduce inflows of government deposits into bank coffers and the banks also face net interest margin pressures from low interest rates. The new challenges add to headwinds lenders were already facing amid a subdued economy. UAE banks, however, hold strong capital and ample liquidity, which will help buffer the impact.

The outlook for the Bahrain banking system has been changed to negative , reflecting the deterioration in economic conditions in the kingdom as a result of the collapse in the oil price and the spread of the coronavirus across the Gulf. A 4.3 billion Bahraini dinar stimulus package approved by government will support citizens and private-sector businesses impacted by coronavirus spread. Further support from the GCC development fund and aid package will also provide a buffer. However, the government's weakening fiscal position weighs on the banks' credit profiles through their increasing public sector exposure. Bahraini banks’ adequate capital levels and healthy liquidity buffers should provide support against anticipated funding and profitability pressures.

The outlook for the Omani banking system remains negative, reflecting the expectation that banks will face deteriorating asset quality and profitability, continued tight funding and liquidity conditions, as well as declining capacity of the Government of Oman to support banks in case of need. The negative outlook already reflected the impact of moderate oil prices, but now also takes into account the combined economic impact from the coronavirus pandemic and the further drop in oil prices. Omani banks, however, hold strong capital buffers which will provide good loss absorbency in the months ahead.

To see the complete banking sector outlook reports, click the weblink for each country: Bahrain Kuwait Oma n Qatar Saudi Arabia United Arab Emirates docid=PBC_1218705

For more research and insight on the coronavirus (COVID-19) outbreak, please see coronavirus

Subscribers can access the report at: docid=PBC_1219741

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