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Low oil prices to pressure GCC banks' profits - Moody's

Low oil prices to pressure GCC banks' profits - Moody's
Photo Credit: Arabianeye-Reuters

Moody's expects that the unique interlinkages that exist between oil, public spending and banks in the Gulf Cooperation Council (GCC) will first result in reduced banking system liquidity, with secondary effects on credit growth and profitability.

Nonetheless, bank ratings are expected to remain broadly resilient, Moody's said.

"As a result of sustained low oil prices, we expect banking systems in the region will primarily face a decline in liquidity as government-related deposit inflows are reduced" says Khalid Howladar, Senior Credit Officer at Moody's.

According to the rating agency, government-related deposits provide a substantial 10% to 35% of banks' non-equity funding.

Moody's also expects that lower oil prices will weigh on confidence and hence economic growth, leading to weaker lending growth and, ultimately, lower profitability.

Nevertheless, the rating agency anticipates broad resilience in the GCC banks' fundamental credit profiles given their robust capital and liquidity buffers.

"The GCC banks' stock of liquid assets are healthy and their reliance on market funding is generally limited, leaving some headroom for banks to adjust to changing funding conditions in an orderly fashion" Howladar said.

He added that the downside effects of the lower oil prices projected for 2015 and 2016 are likely to be moderated by the proactive policy responses of GCC governments, which implies that each of the GCC banking systems will display varying degrees of resilience that are broadly in line with the pressures faced by their respective sovereigns.

Moody's said that Kuwait (Aa2 stable), Qatar (Aa2 stable), Saudi Arabia (Aa3 stable) and the United Arab Emirates (Aa2 stable) are able to better support their economies and banking systems due to their sizeable reserves, whereas banks operating in Bahrain (Baa2 negative) and Oman (A1 negative) are more vulnerable to a more pronounced or more prolonged period of low oil prices than expected.

Moody's central assumption is that oil prices will average $55/barrel (Brent) in 2015, rising to $65 on average in 2016.