Standalone creditworthiness remains strong for Qatar’s banks, Moody’s Investor Service said and noted that government willingness and capacity to support banks in a crisis boost their long-term credit ratings.
Economic recovery and higher oil prices are building investor confidence in the region, Moody’s said in its latest ‘Banks — Gulf Co-operation Council: 2022 Outlook’.
GCC banks’ strong capital and liquidity shield against rising non-performing loans as loan repayment holidays and other pandemic support schemes expire. “The outlook for GCC banks is stable as the region’s economies recover,” it said.
Capital will remain strong, providing a solid loss-absorbing buffer, Moody’s said and noted high levels of loss-absorbing capital are a key credit strength of GCC banks. The shock from the pandemic made little impact on GCC banks’ strong capital buffers. Most banks remained profitable despite higher loan-loss provisioning responsible actions by banks and regulatory controls limited dividend payouts during the pandemic and so helped keep capital buffers steady. Capital requirements set by GCC bank regulators are higher than guidance provided under Basel III global capital standards. This is to counter risks posed by large concentrations of loans to single borrowers and to a limited number of sectors. Loan concentrations reflect a lack of diversification in GCC economies and the control of certain large family-owned conglomerates on business activity.
Banks are increasingly issuing cheaper Basel III-compliant Additional Tier 1 capital instruments (particularly in the UAE and Qatar) and Tier 2 capital instruments (predominantly in Saudi Arabia). These provide an additional cushion of regulatory capital, Moody’s said.
Ample provisions provide an extra buffer against credit losses, Moody’s said and noted provisioning coverage is highest in Kuwait, Qatar and Saudi Arabia, lowest in Bahrain.
Overall loan-loss reserves (including Stage 1, 2 and 3 IFRS 9 expected credit losses) for GCC banking systems remain healthy and cover more than 100% of problem loans on average, the outlook said.
“We expect loan-loss coverage to remain healthy despite a small increase in problem loans as loan repayment holidays schemes expire. Real-estate collateral pledged against many problem loans provide additional security,” Moody’s noted.
GCC bank’s profitability is recovering but remains below pre-pandemic levels, it said.
The provisioning needs will fall but will remain higher than average. Higher rates will be positive for GCC banks’ margin.
“We expect the profitability of GCC banks to pick up after the shock of the pandemic, but a full recovery will take some time. Provisioning charges will decline significantly but remain higher than normal because new problem loans will form as loan repayment holiday schemes expire,” Moody’s said.
Most GCC countries maintain currency pegs against the dollar and follow the US Federal Reserve policy interest rate. Expectation of higher rates will be positive for banks’ margin. Investments in IT infrastructure and digital strategies will allow banks make cost savings. These measures will keep GCC banks’ cost-to-income ratios stronger than those of global peers, Moody’s said.