07/12/2017 08:27 AST

Moody’s says its 2018 outlook for GCC banks is stable overall, reflecting strong financial fundamentals, particularly in the largest banking systems, that provide resilience to profitability and loan quality challenges from slower economies. Fiscal and geopolitical risks pose challenges, however, continue to pose challenges for various countries.

"The strong financial fundamentals in the Gulf banking systems makes the industry more resilient to lower profitability and weaker loan quality issues," said Olivier Panis, a Vice President and Senior Credit Officer at Moody's. "Nonetheless, fiscal and geopolitical risks pose challenges in Qatar, Oman and Bahrain."

Moody's forecast that real GDP growth in the region will pick up slightly to around 2% in 2018 from 0% in 2017, as oil prices stabilize between $50 and $60 a barrel.

Although fiscal consolidation efforts in the region will persist, key regional infrastructure projects, such as UAE Expo 2020, World Cup Qatar 2022 and the Saudi National Transformation Program will support capital spending and credit growth which should expand by 5% in 2018.

Tangible Common Equity (TCE) ratios will remain broadly in the 11%-16% range and problem loan coverage, at around 95%+ across the region, is high.

Individually, in the UAE, Saudi Arabia and Kuwait, which account for around 75% of GCC banking assets, the outlook is stable.

However, Bahrain and Oman are more weakly positioned in respect to their fiscal position. In Qatar, a diplomatic row with several other GCC members has severely impacted trade and tourism, putting pressure on banks' loan quality.

Problems loans for the region's banks will edge higher in 2018 following sluggish economic activity in 2017, and banks remain vulnerable to high borrower and sector loan concentrations, as well as uneven disclosure in the corporate sector.

Profitability will also decline slightly, albeit from high levels, as low credit growth will weigh on interest income and on fees and commissions.

Loan performance will remain solid overall. Nonperforming loans (NPLs) will edge higher in a context of sluggish economic activity and hover between 3%-4%. Sectors sensitive to fiscal consolidation such as contracting, construction, real estate, retail and SME will bear the brunt. Concentrations of loans to single borrowers and sectors expose banks to unexpected shocks. However, the introduction of credit bureaus and the use of forward-looking credit management tools in line with new IFRS 9 accounting standards will further improve banks’ risk controls and strong provisioning coverage levels.

Capital cushions will remain strong (TCE* 11%-16%), providing resilient risk buffers in our stress test.

Profitability will decline from high levels. Low credit growth will weigh on interest income and on fees and commissions, and provisioning charges will increase. The banks have generally adapted their cost structure to a lower growth environment, and rising yields on loans will partly offset increasing funding costs as the US dollar-pegged GCC economies follow US Federal Reserve interest-rate hikes.

Bank funding is anchored by low-cost and stable deposits, a credit strength. A lengthy funding squeeze, stemming from low oil prices, eased in 2017 after governments injected liquidity from international debt issuances. However, private-sector deposit growth remains low and the banks’ heightened dependence on public-sector deposits increases their vulnerability to deposit volatility. Recourse to confidence-sensitive market funding will remain low at around 13% of total assets, but some countries (Bahrain, Qatar) are heavily exposed to confidence-sensitive foreign liabilities.

Liquidity buffers will remain high. Liquid assets are 20%-30% of total assets and the vast majority of banks are compliant with Basel III Liquidity Coverage Ratio r


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