Operating conditions for GCC banks will remain difficult and loan quality will deteriorate but remain sound in 2021, says a Moody's Investors Service report.
Profitability will weaken, but capital will remain strong and stable, it said.
The negative 2021 outlook for Gulf Cooperation Council banks is driven by subdued economic growth, continued business disruption related to the coronavirus outbreak, and fiscal consolidation that is pressuring loan quality and profitability, Moody's Investors Service said.
Lower oil revenues have reduced deposit inflows from governments, the banks’ largest depositors, slightly squeezing their funding costs, while the deterioration of sovereign credit profiles could weaken governments’ capacity to support failing banks.
“Pressure on loan quality and profitability are the main drivers behind our negative outlooks on all six banking systems in the countries of the Gulf Cooperation Council,” said Ashraf Madani, a Moody’s Vice President – Senior Analyst and the report's co-author. “Despite the negative outlooks, GCC banks’ creditworthiness remains in many cases strong, particularly for those in Kuwait, Saudi Arabia and Qatar.”
Profitability will weaken as provisioning needs rise and yields fall. Moody’s expects an average return on assets of around 1.0%-1.2% for 2020 and 2021, down from around 1.5% for 2019.
A slew of mergers across the region that started in 2016 will continue, driven by subdued economic growth, stiff competition and an over-abundance of small banks.
The negative outlook could turn stable if there is strong rebound in economic growth and a relaxation of fiscal consolidation measures, as well as a return to high levels of government spending. A significant increase in oil prices which boosts investor confidence would also be positive, as would the end of the pandemic and a resumption of normal activities, it said.
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