The outlook for Gulf Cooperation Council (GCC) and Middle East banks is generally stable in 2012. Almost all the region’s banks’ Issuer Default Ratings (IDR) is on Stable Outlook, as a result of the probability of sovereign support, according to Fitch Ratings newly published report.
Fitch’s view of sovereign creditworthiness in the region has generally remained unchanged despite regional unrest and most sovereign ratings are on Stable Outlook. The intrinsic outlook for the banks in the region is also stable, moving to positive in the medium term, which could lead to some recovery in Viability Ratings (VR).
Most sovereigns in the region, especially in the GCC, are helping to stimulate their economies through government-sponsored infrastructure projects, taking advantage of their significant government revenue and sovereign wealth funds. The oil price has remained above $100 per barrel, generating strong revenues, comfortably above budget requirements. Non-oil producers will, however, be at a disadvantage, in the absence of economic growth.
Within the GCC, unrest has particularly affected Bahrain and, to a lesser extent, Oman, although, in both cases, there was limited impact on the banking system. Elsewhere in the Middle East, considerable uncertainty remains in Egypt and Libya, and serious disturbances continue in Syria, which could have a significant impact on neighbouring countries.
Asset quality in the GCC is expected to recover, except for the UAE. Fitch believes that problem loans have peaked and expects recoveries and generally lower impairment charges in 2012. Non-GCC countries may however suffer further problems due to the continuing uncertainty and unrest.
Margins and fee income have been under pressure due to low interest rates and subdued volume growth. However, lower impairment charges and cost control should lead to a gradual improvement in profitability. Fitch expects some loan growth in 2012, as confidence improves and infrastructure projects come on stream, stimulating the local economies, but much depends on developments in the global economy.
Most banks in the region are funded by customer deposits with little or no reliance on the debt capital markets. There is significant liquidity in most markets. In recent months, some banks have accessed the international debt capital markets (through bonds and sukuk) to address funding mismatches and refinance maturing debt. Fitch expects this to continue in 2012, subject to market conditions, as the banks experience renewed growth.
Capital levels are not generally a constraint, and Fitch believes that in most cases additional capital would be available from shareholders. Most governments in the region have provided support to their banking systems through additional liquidity (and, in a few cases, capital injections). Fitch expects such support to continue.
Any change in the outlooks would depend on changes in the sovereign ratings in the region or a change in Fitch’s opinion of the sovereigns’ propensity to provide support. As there is a strong culture and track record of sovereign support for banks, and many banks have significant government stakes, it is highly unlikely that Fitch’s opinion on sovereign support will change in the foreseeable future. VRs may be upgraded case by case as the banks recover from recent asset quality and profitability issues, although some UAE banks, in particular, may experience VR downgrades.