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Fitch: GCC Islamic Banks' Outlook Negative - Weak Asset Quality; Improving Liquidity and Earnings
December 7, 2017 / 1:55 PM / 6 days ago

Fitch: GCC Islamic Banks' Outlook Negative - Weak Asset Quality; Improving Liquidity and Earnings

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Fitch 2018 Outlook: Gulf Cooperation Council Islamic Banks here LONDON, December 07 (Fitch) Fitch Ratings says in a new report that 17% of its rated Islamic banks in the Gulf Cooperation Council (GCC) region have a Negative Outlook. All the Negative Outlooks are in Qatar and are driven by the Qatari political dispute, which is affecting Qatar's ability, but not propensity, to provide support its banks. The 2018 sector outlook for GCC Islamic banks is negative as weaker economic growth feeds through to credit fundamentals and with lower financing growth. As a result, asset-quality metrics will continue to see a mild deterioration. Nevertheless, liquidity is improving with government issuance and lower financing growth. Oil generates about 60% of government revenue in the GCC. Oil price expectations indicate that the fiscal deficits will continue to be large in Bahrain, Oman and Saudi Arabia. Fitch forecasts mild GDP growth of 1.5% in 2018 after a 0.1% contraction in 2017 due to oil output cuts. However, fiscal adjustments are unlikely to be sufficient to close gaps in sovereign budgets in 2018, so GCC government spending - a major source of growth in the GCC - will continue to be muted. Nevertheless, Fitch expects non-oil to grow 2%-3% in 2018 and continue to be the main driver of growth. Fitch expects financing portfolios to season quicker with low financing growth, resulting in mild deterioration in impaired financing ratios. Deterioration in certain corporate segments, particularly contracting and SMEs, is starting to filter down to other segments, including retail. Financing concentration remains a key risk. High levels of reserve coverage are likely to be sufficient to meet IFRS 9 requirements. Withdrawn sovereign-related deposits have generally been replaced as a result of government issuance and subsequent liquidity injections back in the banking systems. However, lower deposit growth will put pressure on the ability to finance, but this will be partially matched by lower demand. Funding costs have eased as a result of improved liquidity, but are not expected to return to 2014 levels. However, low GDP growth, low financing growth in the banking sector, combined with more expensive funding costs, will continue to put pressure on banks' financing portfolios and revenue. Nevertheless, GDP will rise in 2018 and banks have been able to reprice their financing books. Islamic banks are also well placed for further interest rate rises due to high levels of non-remunerated deposits. We expect capital levels to be largely unchanged in 2018 due to lower financing growth. Ratios are above international peers', but buffers are only adequate given high concentration (single borrower and sector) and therefore event risk. Contact: Redmond Ramsdale Head of GCC Bank Ratings +44 20 3530 1836 Fitch Ratings Limited 30 North Colonnade London E14 5GN Bashar Al Natoor Global Head of Islamic Finance +971 4424 1242 Media Relations: Rose Connolly, London, Tel: +44 203 530 1741, Email: rose.connolly@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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