Fitch maintains stable outlook on GCC banks

Majority of the banks in the Gulf Cooperation Council (GCC) maintain a stable outlook, supported by steady oil prices and outlooks on all GCC sovereign remaining stable, Fitch Ratings said in a recent report.

Pressure on asset quality is likely to remain a theme in the GCC, particularly in the UAE, where real estate prices have fallen more than 20 percent in the past three years and loan growth is weak, it added.

The region’s banking sector will see a rise in merger and acquisition (M&A) activity, particularly where it creates or strengthens domestic leaders. However, integration risks can be high, especially w here a merger involves both conventional and Islamic banks, it added.

Meanwhile, slowing economies are causing difficulties for banks in emerging markets (EMs), Fitch said.

Slower GDP growth, greater trade protectionism, currency depreciation against the US dollar and political turbulence are significant risks in several EM banking systems in the near term, with ratings most vulnerable in Turkey and Latin America.

However, banks in Asia are supported by stronger GDP growth and banks in much of the GCC region and the Commonwealth of Independent States are benefiting from relatively stable oil prices.

“We forecast economic growth in EMs to soften to 4.5 percent in 2019 from 5.1-5.2 percent in 2017-2018 as evidence hardens of a slowdown in China and elsewhere, including abrupt adjustments in Turkey and Argentina,” the report noted.

“But, we expect EM growth to pick up to 4.8 percent in 2020 due to policy-easing in China and reduced pressure on EM central banks to raise interest rates, which should help borrowers,” it added.

In Asian EMs, banks' credit profiles are supported by relatively strong GDP growth and most ratings are on stable outlook, reflecting good loss-absorption buffers or external support. 

However, potential macroeconomic headwinds include a stronger US dollar, softening global trade and slower growth in China, and their impact could be more pronounced due to the rapid credit growth of the past decade, the report said.