Rating of GCC banks, sovereigns stable despite regional risks: S&P

Ratings and outlooks of sovereigns and banks in the Gulf Cooperation Council (GCC) remain “unchanged” despite increasing tensions between the US and Iran, S&P Global Ratings said in a recent report.

Most GCC governments possess sufficient liquid assets and foreign exchange reserves to support banks if required, but such support could weigh on some sovereigns' fiscal and external profiles, it added.

For most banking systems in the GCC, strong customer bases support their system wide funding profiles, with loan-to-deposit ratio reaching 99 percent on average for the six GCC countries by 2018-end.

In its hypothetical bank funding-related stress tests designed to assess the credit situations of the lenders, S&P said that GCC lenders will not require help from their governments in case of a "modest" geopolitical escalation in the region.

But, in a “more severe” hypothetical stress scenario, the rating agency sees potential funding gaps in all banking systems except in Kuwait, as Bahraini banks will require the most support as a proportion of GDP.

In its base case scenario, S&P said it does not expect direct military conflict between the US and Iran or their regional allies. However, it expects the Strait of Hormuz to remain open to the global oil trade.

“If the Strait were blocked (even for a few days), or if there is a significant escalation in tensions, the potential related loss of investor confidence could weigh on the ratings of GCC banks and sovereigns,” the report said.