Fitch: Low Oil Prices Weakens State Support and Operating Environment for GCC Banks
Nevertheless, the sovereign ability to provide support has diminished in Saudi Arabia, Oman and Bahrain with the fall in oil prices since mid-2014 and this has reduced the average Issuer Default Rating (IDR) by one notch in these three countries in the past 12 months.
In its 2016 compendium on GCC banks, Fitch says of the IDRs assigned by the agency to banks in the GCC region, 96% are investment-grade and 82% are driven by potential sovereign support.
Just over half of Viability Ratings (VRs), which measure banks' individual credit profiles, are investment-grade and risk appetite/asset quality the main shortfalls. The operating environment has become a constraint on VRs in Saudi Arabia, Oman and Bahrain following the fall in oil prices. The average VRs in Saudi Arabia and Oman have been downgraded by one notch in the past 12 months.
Most of the 20 largest banks are in Saudi Arabia and the UAE (reflecting their larger economies), alongside domestic flagship banks. Qatar National Bank remains number one (by assets and by loans) after its acquisition of Turkey's Finansbank and National Bank of Abu Dhabi would rank a close second (by the same measures) after its merger with First Gulf Bank.
The fastest-growing banks have had less liquidity pressure than peers since 2015. Most are Islamic and benefit from strong demand for Islamic products. Some are in the start-up/growth phase as recently created banks looking to gain market shares (Noor Bank, Barwa Bank, Warba Bank). Growth in Qatar is clearly above GCC peers as government spending has remained strong. Growth in Oman, the UAE, Kuwait and Saudi Arabia is more reasonable but still exceeds GDP growth. Bahrain is lacking economic stimulus.
Profitability remains strong in all countries. It mostly benefits from very cheap funding and has improved with lower loan impairment charges. Higher performance ratios in Qatar, the UAE and Saudi Arabia reflect more dynamic operating environments with more lending opportunities. The lowest cost/income ratios are recorded at banks that focus on large deals or have small, if any, branch networks.
Impaired loans ratios have benefited from strong growth and loan restructuring (notably in the UAE) but are expected to worsen if oil prices remain low for longer. UAE banks still post the highest average impaired loan ratio as they carry some legacy loans from the global financial crisis. The average loan loss reserve coverage ratio is at least 100% in all countries.
The average Tier 1 ratio is adequate in all countries. Issuance of additional Tier 1 capital has boosted Tier 1 ratios and offset the negative impact on the total capital adequacy ratio of the phasing out of Tier 2 capital where Basel III has been implemented. Most of the highest capital ratios reflect low lending opportunities, such as National Bank of Bahrain, start-up/growing phase or higher-risk appetite, such as National Bank of Ras Al-Khaimah.
The average loans/customer deposits ratio remains at about 100% in all countries except in Bahrain (82%) and Saudi Arabia (84%). The ratio is increasing in all countries except Bahrain (scarcity of lending opportunities) and some banks have been hit heavily since 2015 by large deposit withdrawals. Saudi banks remain the least dependent on market funding.
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