Fitch outlook for GCC banks stable, but risks remain

The outlook for Gulf and Middle East banks is generally stable in 2012 with asset quality likely to improve in most countries, Fitch Ratings has said in a new report. The rating agency said almost all the region's banks' issuer default ratings (IDR) are on stable outlook, as a result of the probability of sovereign support. "Fitch's view of sovereign creditworthiness in the region has generally remained unchanged despite regional unrest," the report said. "The intrinsic outlook for the banks in the region is also stable, moving to positive in the medium term, which could lead to some recovery in viability ratings," it added. Fitch said asset quality in the GCC is expected to recover, except for the UAE. It believes that problem loans have peaked and expects recoveries and generally lower impairment charges in 2012. Non-GCC countries may however suffer further problems due to the continuing uncertainty and unrest, Fitch added. Within the GCC, Fitch said unrest has particularly affected Bahrain and, to a lesser extent, Oman, although, in both cases, there was "limited impact on the banking system". Fitch said most sovereigns in the region, especially in the GCC, are helping to stimulate their economies through government-sponsored infrastructure projects, taking advantage of their significant government revenue and sovereign wealth funds. It added that because the oil price has remained above $100 per barrel, strong revenues have been generated, comfortably above budget requirements. Non-oil producers in the region will, however, be at a disadvantage, in the absence of economic growth, the Fitch report said. It added that margins and fee income have been under pressure due to low interest rates and subdued volume growth. "However, lower impairment charges and cost control should lead to a gradual improvement in profitability," Fitch said, adding that it expects some loan growth in 2012, as confidence improves and infrastructure projects come on stream. Fitch also expects the trend of banks accessing international debt capital markets - through bonds and sukuk - to continue in 2012, subject to market conditions, as the banks experience renewed growth. The rating agency said any change in the stable outlooks would depend on changes in the sovereign ratings in the region or a change in Fitch's opinion of the sovereigns' propensity to provide support. "As there is a strong culture and track record of sovereign support for banks, and many banks have significant government stakes, it is highly unlikely that Fitch's opinion on sovereign support will change in the foreseeable future," the report noted.