* GCC banks' outlook for the next 12 to 18 months is stable amid region’s economic recovery and higher oil prices, Moody’s Investors Service said in a report
FIFA World Cup Qatar 2022 and 'gigaprojects' in Saudi Arabia as part of kingdom’s Vision 2030 programme will drive credit demand and raise the private-sector debt, Moody’s said and noted GCC banks' outlook for the next 12 to 18 months is stable amid region’s economic recovery and higher oil prices.
The Gulf Co-operation Council (GCC) banks’ standalone credit profiles remain strong, aided by high capital buffers, solid profitability and improving economic conditions, Moody’s Investors Service said in a report published yesterday.
GCC banks, it said are mostly funded by deposits, which are considered a strength, and their liquid assets are high.
Non-performing loans will rise slightly as loan payment holidays expire but asset quality will remain sound overall
GCC banks hold strong buffers of liquid assets that range between an average of 25% and 30% of their banking assets, and Moody’s expects them to remain steady and provide a shield against unexpected shocks.
Loan performance will weaken when payment holidays expire, with the impact being heaviest in the UAE and Bahrain, while less pronounced in Qatar and Kuwait.
The willingness of GCC governments to support banks in a crisis remains very high, and most have ample capacity to provide support thanks to large sovereign wealth funds.
“Economic growth in 2022 will reflect a gradual increase in hydrocarbon production and a strong recovery in other segments of the economy,” noted Ashraf Madani, vice president and senior analyst at Moody’s and the author of the report.
“Banks' asset quality will remain high, even as nonperforming loans rise slightly as repayment holidays expire,” he said.
According to Moody’s, GCC economies are recovering; higher oil prices and production are supporting the hydrocarbon sector, while relaxation of travel and lockdown measures are supporting non-hydrocarbon sectors.
“We forecast real GDP to grow by between 1.85% (Bahrain) and 5.4% (UAE) in 2022. Most GCC sovereigns have a stable rating outlook. Higher oil prices have significantly reduced government financing needs, and we expect the recent increase in government debt burden to reverse or stabilise.
“GCC banks have strong solvency and healthy liquidity buffers. They also benefit from stable and low-cost deposit funding. We expect merger and acquisition activity among banks, which started when oil prices crashed in 2014, to continue.”
All six GCC countries suffered a severe economic contraction as a result of the combined effect of the coronavirus pandemic and drop in oil prices in 2020.
The pandemic receded and oil prices rebounded in 2021and GCC economies are on a firm footing for growth in 2022 and beyond, Moody’s noted.
“Economic growth in 2022 will reflect a gradual increase in hydrocarbon production and strong recovery in the non-hydrocarbon economy after a relaxation of travel and lockdown measures imposed at the height of the pandemic. The magnitude of the recovery will be uneven across the six GCC countries,” Moody’s said.
GCC banks hold strong buffers of liquid assets that range between 25% and 30% on average of their banking assets. These will remain steady, it said.
Historically, liquid assets were placed short-term with central banks or other banks, but banks are increasingly investing in highly liquid, high-yielding government securities issued by their respective sovereigns to fund their budget deficits.
This is benefiting both their liquidity and profitability albeit increasing concentration risk.
Regulators have relaxed regulatory liquidity standards to support lending to the economy during the pandemic, but the majority of GCC banks will remain compliant with Basel III liquidity coverage and net stable funding requirements
“Oman and Qatari banks have historically held lower liquidity buffers than their peers’ because of high credit demand. We expect these to remain lower,” Moody’s noted.