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Five GCC banking systems downgraded over Covid-19, says report

DUBAI, April 2, 2020

Top ratings agency Moody's has changed its outlook to negative from stable for five GCC banking systems of Saudi Arabia, UAE, Kuwait, Qatar and Bahrain because of the oil price collapse and coronavirus outbreak.  
 
For the other Gulf state, Oman, it continued to maintain a negative outlook for its banking system.
 
The main drivers for Moody's actions on the Gulf banking systems are:
 
*The outlook on the Saudi banking system has been changed to negative from stable because of the deteriorating operating environment for banks, caused by the dual blow of a sharp drop in oil prices and the coronavirus outbreak. 
 
"We expect slowing economic activity and disruption caused by the pandemic to weigh on the banks' asset quality and profitability, and their strong funding profile will be pressured as the drop in the oil price constrains government coffers. Additionally, lower interest rates in the kingdom will put further pressure on banks' profitability," remarked Nitish Bhojnagarwala, a Moody’s VP- Senior Credit Officer.
 
*The outlook for the Kuwaiti banking system has been changed to negative from stable to reflect the economic headwinds caused by the disruption to business activity as a result of the coronavirus outbreak and reduced government revenue due to the sudden drop in oil prices. 
 
"Kuwait banks hold ample capital and liquidity and are well able to absorb unexpected losses. But strong measures to curb the spread of the coronavirus will weigh on business activity and Moody's expects deteriorating operating conditions to weaken banks' loan portfolios and lead to rising loan-loss provisions. Together with lower loan growth, this will weigh on the banks' profitability," explained Bhojnagarwala.
 
*The outlook for the Qatari banking system has been changed to negative from stable to reflect the deteriorating operating environment for banks because of the coronavirus pandemic and hydrocarbon price collapse. Qatari banks are well capitalised and profitable, and they are highly likely to benefit from government support if required. 
 
"Nevertheless, Moody's expects the severe disruption to civilian life and to business activities to lead to rising problem loans and weaker profitability. Additionally, liquidity pressures in the banking system will increase as banks' reliance on foreign funding will increase over the outlook period," said the top Moody's official.
 
*The outlook for the UAE banking system has been changed to negative from stable to reflect the expectation of weakening loan quality and profitability at UAE banks and tighter access to funding as the coronavirus outbreak hits the economy. 
 
"The UAE economy is particularly exposed given the importance of non-oil sectors to the economic activity, including tourism, transportation, trade and real estate sectors. Low oil prices will reduce inflows of government deposits into bank coffers and the banks also face net interest margin pressures from low interest rates" remarked Bhojnagarwala. 
 
"The new challenges add to headwinds lenders were already facing amid a subdued economy. UAE banks, however, hold strong capital and ample liquidity, which will help buffer the impact," he added.
 
*The outlook for the Bahrain banking system has been changed to negative , reflecting the deterioration in economic conditions in the kingdom as a result of the collapse in the oil price and the spread of the coronavirus across the Gulf. 
 
"A BD4.3 billion ($11.3 billion) stimulus package approved by government will support citizens and private-sector businesses impacted by coronavirus spread. Further support from the GCC development fund and aid package will also provide a buffer," explained Bhojnagarwala. 
 
However, the government's weakening fiscal position weighs on the banks' credit profiles through their increasing public sector exposure. Bahraini banks' adequate capital levels and healthy liquidity buffers should provide support against anticipated funding and profitability pressures, he added.
 
*The outlook for the Omani banking system remains negative, reflecting the expectation that banks will face deteriorating asset quality and profitability, continued tight funding and liquidity conditions, as well as declining capacity of the government to support banks in case of need. 
 
Bhojnagarwala said the negative outlook already reflected the impact of moderate oil prices, but now also takes into account the combined economic impact from the coronavirus pandemic and the further drop in oil prices. 
 
Omani banks, however, hold strong capital buffers which will provide good loss absorbency in the months ahead, he added.-TradeArabia News Service



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