Moody's: GCC banks to benefit from public sector spending in 2015

(MENAFN- Arab News) The 2015 outlook for GCC banks is stable but it is negative for those in the rest of the MENA region says Moody's Investors Service in a report published recently.

'The stable outlook for GCC banks is driven by strong operating conditions coupled with expansionary fiscal policies and continued infrastructure spending which remain supportive of credit growth' says Khalid Howladar senior credit officer at Moody's. 'However declining

oil prices if prolonged at these levels will reduce fiscal surpluses affect economic confidence and moderate growth expectations' he adds.

'The negative outlook for the rest of the MENA region reflects more subdued credit growth and unsettled domestic environments which translate into high credit risks' says Constantinos Kypreos senior credit officer at Moody's. 'In addition the high exposure to low-rated government securities links non-GCC banks' credit profiles to their respective sovereigns' he adds.

According to Moody's GCC banks will benefit from continued economic growth and public sector spending in 2015 despite declining oil prices due to strong wealth buffers in place and ongoing infrastructure investment plans. We forecast the Brent oil price to hover around $80-85 per barrel in 2015 however sustained oil prices below our forecast would eventually lead to a weakening of the overall supportive environment.

'In addition to public sector spending improved consumer and business activity particularly in the UAE and Saudi Arabia will support solid GCC lending growth at an average level of around 10 percent in 2015. In addition the stabilisation of local real-estate markets will continue to

be a key driver for lower provisioning expenses and higher profitability particularly for some GCC banks. This will help banks' asset quality improve' notes Howladar.

The deposit-based funding structure of almost all GCC banks will also remain a key credit strength with customer deposits representing 60-90 percent of banks' total liabilities supporting banks' liquidity and funding.

The rating agency notes however that GCC banks' high concentrations of loans to single borrowers and single sectors sizable related-party lending and a lack of transparency persist increasing banks' exposure to event risk.

For the rest of the MENA region Moody's expects that operating conditions will remain challenging for banks with subdued business growth and weak domestic confidence leading to slow credit demand.

While economic output will strengthen in all countries to reach between 2.5 percent and 4 percent in 2015 (from an estimated average of 2.5 percent in 2014) it will remain below pre-crisis historical averages of between 4.8 percent and 7.6 percent in 2004-09 levels needed for a meaningful reduction in unemployment and improved living conditions for the broader populations.

'Non-GCC regional banks continue to finance government deficits crowding out the private sector and maintain high exposure to low-rated sovereigns. In many cases exposure to low-rated governments will continue to increase often amounting to several times' bank capital - we

estimate this at 6.1x for Egypt and 4.9x for Lebanon as of June 2014' says Kypreos.

In addition geopolitical risks will continue due to regional conflicts.

Moreover non-GCC MENA banks' credit risks remain high as deteriorating loan quality is not always reflected in reported figures especially for state-owned Egyptian and Tunisian lenders.

Banks' foreign expansion into high-risk Sub-Saharan Africa for Moroccan banks and aggressive growth in other emerging markets for Lebanese banks poses a further risk says Moody's.

On the positive side the rating agency notes that non-GCC MENA banks will continue to benefit from a deposit-based funding structure supported by inflows of remittances from migrant workers as well as generally high liquidity buffers.