Fitch Foresees Stable Outlook and Loan Growth for GCC and Middle East Banks

The outlook for most banks in the Gulf Cooperation Council (GCC)/Middle East region is stable, largely driven by the probability of sovereign support, according to Fitch Ratings.

The credit ratings agency (CRA) expects loan growth to increase in 2013, as confidence improves and infrastructure projects come on stream, stimulating the local economies, but much also depends on the global economy and regional unrest.

Fitch expects a gradual improvement in profitability at GCC banks on rising fee income, lower impairment charges and cost control despite margins having been under pressure due to low interest rates and subdued volume growth.

Within the GCC, Fitch believes that problem loans have generally peaked and expects lower impairment charges in 2013, although significant legacy problems remain, notably in the United Arab Emirates (UAE) and Kuwait. Recoverability of these loans and related collateral values will depend on market developments. Non-GCC countries may suffer problems due to continuing political uncertainty, social unrest and economic difficulties.

Capital levels are not generally a constraint, and the CRA believes that in most cases additional capital would be available from shareholders. In recent years, most governments in the GCC have provided support to their banking systems through additional liquidity, and, in a few cases, capital injections. Fitch expects such support to continue, as capital and liquidity could come under pressure if there is significant loan growth.

Fitch’s view of sovereign creditworthiness in the region has generally remained unchanged despite regional unrest, and the outlook on almost all sovereign ratings is stable. GCC sovereigns are helping to stimulate their economies through government-sponsored infrastructure projects, taking advantage of their significant oil and gas revenues. Oil production is expected to be lower in 2013, but will nevertheless generate strong revenues for oil exporters.

Any change in the majority of outlooks would result from 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 very strong culture and track record of sovereign support for banks, and many banks have significant government stakes, it is unlikely that Fitch’s opinion on sovereign support will change in the near term.


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