Public spending to support GCC banks next year
DUBAI, December 10, 2015
Public spending will continue to support operating conditions for banks in the Gulf Cooperation Council (GCC), allowing performance to remain resilient into next year, but liquidity will continue to tighten, according to Moody's Investors Service.
It noted that the outlook for the GCC banking sector in 2016 is stable.
Khalid Howladar, senior credit officer at Moody's based in Dubai, said: "Despite the headwinds generated by low oil prices, we expect a broadly supportive operating environment for GCC banks in 2016 due to regional governments' commitment to their counter-cyclical spending policies.
"Events such as the UAE Expo 2020 and World Cup Qatar 2022 are providing anchors for capital expenditures in addition to other key regional infrastructure projects."
Moody's has forecast credit growth in the four to 10 per cent range, as private sector declines are moderated by new government borrowings from local banks, helping to support profitability and margins.
Core revenues will remain robust, driven by bank intermediation and commissions income with little reliance on derivatives or proprietary trading. While asset quality will face mild pressures, it will remain solid overall, with non-performing loans (NPL) expected to reach a GCC average in the three to four per cent range.
Robust capital levels of banks in the region will cushion the impact of further weaknesses in oil prices, economic growth and asset quality, said the report.
Moody's expects tangible common equity (TCE) ratios to remain broadly within the 12 to 16 per cent range, with retained earnings adding around one per cent to TCE over 2016 in some jurisdictions.
"We note that banks' funding costs will continue to rise as credit growth outpaces deposits, and lower oil prices and reduced economic growth weigh on both public and private sector deposit flows," said Howladar.
"However, while we expect a significant increase in market funding levels, deposits will remain a regional strength, comprising 65 to 80 per cent of banks' non-equity funding. Liquidity buffers will decline but will remain high at around 20 to 30 per cent of total system assets."
Finally, Moody's considered that government support capacity and willingness remained high across the region, although Moody's noted that more prolonged period of high fiscal spending and low oil revenues could ultimately impact governments' fiscal position and creditworthiness, which could in turn hit supported bank ratings. - TradeArabia News Service
