The 2022 sector outlook for GCC Islamic banks is neutral, reflecting a modest economic recovery and higher oil prices, said Fitch Ratings in a new report.

Fitch expects continued profitability pressures. Asset quality is not expected to deteriorate sharply following the end of forbearance measures. Capital buffers and liquidity are expected to remain stable and adequate for the risks.

“Negative Outlooks and Watches are mostly in Kuwait and Qatar. The Rating Watch Negative on all rated Qatari Islamic banks reflects their increasing reliance on external funding and rapid asset growth, which may have moderately weakened the sovereign's ability to support the banking system, if needed,” Fitch said in the report titled Gulf Cooperation Council Islamic Banks 2022 Outlook: Pressured Earnings; Stable Capital and Liquidity.

“The Negative Outlook on all Kuwaiti Islamic banks reflects the Negative Outlook on the sovereign, in turn driven by near-term liquidity risk given the depletion of liquid assets in the absence of a debt law,” the report said.

“We expect further M&A activity in 2022 as many Islamic banks have weak franchises lacking strong competitive advantages, particularly in pricing, cost of funding and growth opportunities. Asset quality, profitability and, potentially, capital pressures on these banks could lead to more tie-ups. M&A may also create new Islamic national or regional champions.” – TradeArabia News Service