The outlook for GCC banks remains stable on the back of solid regional economic growth along with strong capital buffers and substantial liquidity of banks, Moody's Investors Service said.
"Government spending programs will push average non-hydrocarbon GDP growth to 2.6 percent in 2020, providing favorable operating conditions for the region's banks," said Nitish Bhojnagarwala, vice-president and senior credit officer at Moody's.
"Declining interest rates will start to pressure banks' net interest margins but margins will remain strong compared with global peers," Bhojnagarwala said in a recent presentation.
"Loan performance will weaken modestly but will remain solid. New problem loans will form primarily in the slowing construction and real-estate sector," the Moody's report said.
The ratings agency expects non-performing loans to stand at a moderate 3.5 percent of total loans by the end of 2020, from an estimated 3.3 percent in 2019.
Capital is a considerable source of strength for GCC banks and it will remain stable at a high level.
Moody's outlook is stable for all GCC banking systems except Oman. It maintains a negative outlook for the Oman banking system, where asset quality will weaken as lower oil prices have dented government spending, and constrained government finances will limit banks' access to funding and liquidity.
S&P Global Ratings in its outlook for GCC banks for 2020 forecast a stable 12 months ahead. It said GCC banks would successfully navigate a less-than-favorable macroeconomic environment in 2020 supported by their solid financial profiles.
"Banks took the opportunity of the transition to International Financial Reporting Standards [IFRS] 9 in 2018 to recognize the effect of the softer economic cycle on their asset quality indicators in a relatively conservative manner. Therefore, we believe that the number of problematic assets, which we define as IFRS 9 Stage 2 and 3 loans, will likely remain stable, but we do not exclude transition between the two categories," said the ratings agency.
S&P analysts expect GCC economies to show modestly stronger economic growth in 2020 after a dip in 2019. "However, GCC countries' growth will remain below that seen during the era of triple-digit oil prices," said S&P.
S&P analysts also expect that GCC banks' profitability would deteriorate slightly or stabilize at best.
Profits will likely be negatively affected by the shift in global monetary policy toward lower interest rates for longer.
"We think this is already triggering a closer look from banks' management toward operating costs, including through higher digitalization and collaboration with Fintech firms. We still believe that Gulf banks' core business activities lending to corporates and retail clients] will be protected from fintech disruption. In the absence of credible alternatives for the financing of their economies, authorities in the GCC will continue to protect their banking systems, while at the same time supporting fintech companies through accelerators and sandboxes," they added.
S&P noted that GCC banks would continue to display strong capitalization by global standards. "Over the past year, we have affirmed most of our ratings on banks in the GCC. We have taken a couple of positive actions because of upcoming mergers or our view of higher systemic importance."
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