Moody's raises Gulf banks' outlook to 'stable' on higher oil prices

Moody's Investors Service changed the outlook for banks in the six-country GCC bloc to stable from negative, citing an improvement in operating conditions after the Covid-19 pandemic.

As higher oil prices aid the economic recovery, banks in the GCC region will record increasing profitability and accelerating credit growth, the rating agency said in a report on Tuesday.

"We have changed banking outlooks in Gulf Co-operation Council states as the jump in oil prices is boosting economic activity and economies are recovering after the coronavirus shock," said Nitish Bhojnagarwala, vice president and senior credit officer at Moody's. "Non-oil activities including tourism will also contribute to the improvement in some areas."

Banks in the GCC stand to gain from higher energy prices and a rise in interest rates that will significantly improve their bottom lines as cost of risk continues to decline amid economic growth in the region, S&P Global Ratings said in a separate report last month.

On March 16, the central banks of the UAE, Saudi Arabia, Bahrain and Kuwait increased their benchmark interest rates after the US Federal Reserve raised its key rates to rein in inflation, which hit a 40-year high in the world’s largest economy.

Banks in the UAE will maintain steady profitability and solid capital buffers, Moody's said.

Loosened pandemic restrictions, a strong vaccination campaign and a rebound in oil prices are the crucial factors boosting economic activity in the Arab world's second biggest economy.

"These factors will help rebuild business confidence, particularly in the large corporate segment and drive modest economic growth in the non-hydrocarbon sectors," Moody's said.

Higher oil prices will further support banks' funding and liquidity.

"The UAE government’s willingness and capacity to support local banks if needed will remain high over the next 12 to 18 months," the rating agency said.

The UAE's real gross domestic product will grow 6.3 per cent in 2022 and 4 per cent in 2023, with the non-oil economy growing 4.4 per cent and the hydrocarbon sector 11.4 per cent, as oil production returns to pre-pandemic levels, Moody's said.

Credit growth in the country will remain solid at 5 per cent for this year as credit demand from the government, businesses and individuals increases modestly, it said.

While uncertainty around global macroeconomic conditions has increased due to the Russia-Ukraine conflict, Moody's does not expect a significant effect on UAE banks given their limited direct exposures to these two countries, it said.

UAE banks' profitability will likely improve modestly in 2022 after a 60 per cent increase in 2021, Moody's said.

"Profitability will benefit from higher interest rates, partially offset by still-substantial loan-loss provisioning. The full benefit of rising rates will be evident towards the end of the outlook period in the form of higher interest income," it said.

"Operating expenses will increase in tandem, however, but higher revenue generation balanced by costs and investments in staff and technology will drive strong and stable efficiency for UAE banks."

Banks in Saudi Arabia will see increasing profitability and accelerating credit growth as high oil prices boost the economy, Moody's said.

The pick-up in lending growth will partly offset pressure on banks' loan quality as central bank loan repayment deferral programmes end.

The stable outlook also reflects Moody's expectations that the government's capacity to support banks in a crisis will remain intact, it said.