GCC banks face challenges as oil income slows

GCC banks may face challenges as operating conditions weaken and lower oil income weighs on the governments’ willingness to support, Moody’s Investors Service said in a report released Monday.

With pressure building on GCC government’s financial reserves, their desire to intervene may shift.

Governments may favor banks that are “more systemically important” and government-owned, instead of smaller domestic lenders. Moody’s has already assigned negative outlooks to Bahrain and Oman based on their high fiscal breakeven prices and deficits, limited government resources, and weaker domestic economies.

“Despite low oil prices and a high dependency on oil revenues across the GCC countries, banks' ratings in the region continue to benefit from their governments' willingness to tap accumulated wealth to support counter-cyclical spending,” said Khalid Howladar, a Senior Credit Officer at Moody's and co-author of the report. “However, continued oil price declines signal increasing challenges to the sustainability of this dynamic.”

Government deposits have been significantly reduced without the steady oil revenue, leading to tighter liquidity in GCC banks. Loan growth and top-line earnings will also be negatively affected as public spending slows.

“Reallocation of oil revenues to the broad domestic economy through direct public spending and through the banking sector is a key driver of the favorable conditions that have long supported GCC banks,” said J-F Tremblay, Associate Managing Director at Moody's and co-author of the report.

With the absence of some repatriation of foreign capital placed internationally by sovereign wealth funds, liquidity in the banking system stands to be reduced further, the report added.

Write to Matthew Watson at matthew.w@argaamplus.com