Bad loans at GCC banks to edge up next year

Moodys said that it expects non-performing loan ratios at GCC banks to 'slightly increase' during 2017, as slowing economic activity and tightening liquidity lead to a rise in new problem loans and loan restructurings.

Bad loan ratios are expected to edge higher across the regional banking sector next year as lenders absorb the impact of the economic slowdown.

Moody’s said on Wednesday that it expects non-performing loan (NPL) ratios at GCC banks to “slightly increase” during 2017, as slowing economic activity and tightening liquidity lead to a rise in new problem loans and loan restructurings. NPL ratios are expected to remain in the range of 3 to 4 per cent for 2017.

However, the impact of such bad loans on local banks will be moderated by the continuing resolution of significant legacy exposures in some jurisdictions, together with improved collateral, said Moody’s.

Fitch predicted that borrowers will continue to struggle to cope in 2017 with higher utility and petrol prices, together with new taxes introduced by governments to address fiscal deficits.

“We expect asset-quality metrics to decline slightly in 2017 as lower government spending and GDP growth affects the loan portfolios,” Fitch said in a statement on Wednesday.

“The loan books are very concentrated, with large single-name exposures, and high sector concentrations, particularly to real estate and contracting.”

Fitch said that the outlook for the banking sector remains negative for 2017, with credit fundamentals hit by weaker economic growth.

The credit ratings agency said that it expects oil prices to flatline next year, with Brent crude expected to average around $45 a barrel a year, weakening the ability of GCC sovereigns to support the banking sector.

Moody’s, meanwhile, said it expects the stabilising of oil prices to ease fiscal pressures on governments, with countercyclical spending polices supporting non-oil GDP growth, leading to a more stable outlook for regional banks.

“While operating conditions for banks in the Gulf Cooperation Council will remain challenging, the stabilisation of oil prices – albeit at a low level – and resilient non-oil sectors will moderate pressures on the banking sector from slowing economic growth, fiscal reforms and spending cuts,” said Olivier Panis, a vice president at Moody’s.

Follow The National's Business section on Twitter