Outlook for the Gulf Cooperation Council (GCC) banks looks stable in the year ahead largely driven by the probability of sovereign support, according to Fitch Ratings.
The rating agency says regional unrest has had a negative impact on rating outlooks in other countries in the Middle East (Jordan, Lebanon and Egypt), although they have returned to stable for Egyptian banks.
“Public spending on major projects in Kuwait needs to be accelerated and sustained to feed through into banks’ Viability Ratings,” says Fitch.
“A positive impact from economic growth in Saudi Arabia is expected, although this is less likely to have an impact on banks’ Viability Ratings, considering their current high levels. On the other hand, a deeper than expected fall in oil prices could start to put negative pressure on the sector outlooks in some of the smaller GCC countries,” it adds.
Were the improvement in Egypt to translate into a positive rating action on the sovereign, the banks’ ratings would also be positively affected. Any recovery in other Middle Eastern countries will primarily depend on political solutions to the current unrest, Fitch indicates.
A major driver of growth in the GCC is government-sponsored infrastructure projects, as sovereigns take advantage of their significant oil/gas revenues to expand the non-oil sector.
Even if oil prices fall further, Fitch does not expect GCC governments to stop or postpone large infrastructure projects in 2015.
Fitch believes that problem loans have generally peaked within the GCC and impairment charges should continue to fall, leading to higher profitability.
Further recovery will depend on economic growth. Growth prospects in Egypt are improving with the more stable political outlook, and credit risk in the country will eventually reduce.
Other Middle Eastern countries may suffer further challenges from continued political uncertainty and economic difficulties.
Capital levels are expected to remain sound, unless there is significant loan growth. Within the GCC, the banks also enjoy ample liquidity, supported by substantial deposits placed by the governments and related entities.