Riyadh – Mubasher: Fitch Ratings said the 2021 sector outlook for GCC Islamic banks is stable, reflecting a modest expected economic recovery.

However, it expected asset-quality and profitability pressures to continue and predicted capital buffers and liquidity to remain stable and adequate for the risks, according to a recent press release.

The negative outlook on the Saudi sovereign and pressures on the Saudi operating environment result in negative outlooks on the Saudi Islamic banks, highlighting the continued weakening of the sovereign's fiscal and external balance sheets, which has been accelerated by the coronavirus pandemic and lower oil prices.

Fitch has stable outlooks on all other rated Islamic banks in the GCC, capturing stable sovereign ability to provide support to domestic Islamic banks.

Furthermore, Fitch noted that GCC Islamic bank ratings are highly sensitive to sovereign pressures as potential sovereign support drives 88% of Islamic banks' long-term issuer default ratings in the GCC.

“We expect further M&A activity as many Islamic banks have weaker franchises that lack strong competitive advantages, particularly in pricing, cost of funding, and growth opportunities. The challenging operating environment is likely to put more pressure on these banks and lead to more tie-ups. M&A may create new Islamic national or regional champions,” the rating agency concluded.