The GCC Banking sector outlook lifted by stability in Oil Prices: stated by Fitch

  • Banks from other emerging markets measured down with slow economic growth, a slump in Gross Domestic Product (GDP) growth, currency depreciation against US Dollar, etc. and even facing in downgrade risks.
  • According to the recent Fitch Ratings, the relatively stable Oil prices have made a significant impact on lifting the overall outlook of the Arabian Gulf Banks this year, although their counterparts from other emerging markets are struggling and facing a slump in their economic growth, with few of them even siding in downgrade ratings.
  • The Fitch Ratings report regarding the EM (Emerging Market) Banking sector recently also stated that, “Relatively slowness in GDP (Gross Domestic Product) growth, greater trade protectionism, currency depreciation against the US Dollar, political turbulence are few amongst the significant risks affecting the Banking systems across several Emerging Markets, with the ratings mostly vulnerable in Turkey and Latin America.”

The report also forecasted softening of the average Economic Growth from 5.1-5.2 percent in 2017-18 respectively to 4.5 percent in 2019. This is on the backdrop of the slowdown as witnessed in the Chinese market and sharp growth adjustments in Turkey and Argentina.

However, the positive outcome as per the Fitch ratings report is that, “The overall economic growth is expected to pick up to 4.8 percent by 2020 in emerging markets, with the easing on Policy in China as well as lowering pressure on EM (Emerging Markets) central banks to raise interest rates, which supports the borrowers.

Amongst the six-member economic bloc of the GCC, a few of the banks have still faced immense pressure on asset quality in the past three years as the real estate sector in particular softened in the region.

However, with the Oil prices stability being achieved, mitigating all the risks, all GCC sovereign ratings enjoy a ‘stable’ outlook under Fitch’s rating system, which in turn makes these GCC Banks achieve best stable outlook issuer default ratings translating them into most trustworthy banks across regions.

The report compiled by Fitch also added that “Banking sector consolidation in GCC is all set to be continued with the several high-profile banking mergers in the past year with the lender seeking to gain and as well boost the profits amidst the toughest operating conditions prevailing within the Emerging Markets.”

For Illustration: – During May, Abu Dhabi Commercial Bank merged with Union National Bank, and the combined entity also acquired Al Hilal Bank as its Sharia-compliant lending unit, thus creating UAE’s third-largest financial institution with Dh423 billion in assets.

Other regions like Saudi Arabia’s National Commercial Bank is pursuing its merger with Riyadh Bank and as well as Omani lenders Bank Dhofar and National Bank of Oman are also pressing for further merger talks.

Fitch Ratings also stated that “M&A (Merger and Acquisitions) activities continue to take place in GCC, wherein shareholder’s value could be increased as a result of the surge in competitive advantages, especially wherein it focusses on creating a perfect platform on strengthening domestic leadership.”

The report, however, noted that “Integration could be a tad challenging, specifically a merger which involves both the conventional as well Islamic Banks.”