Moody’s Investors Service (Moody’s) has taken rating actions on 26 banks located in the Gulf Cooperation Council (GCC), where persistently low oil prices have triggered a combination of: (1) fiscal pressure on their governments, signaling a potential reduction of government capacity and willingness to support the banks in case of need; and (2) weakening operating conditions for the banks. The rating action on the banks was triggered by the weakening of their respective government’s credit profiles, as reflected by Moody’s review for downgrade of governments of Bahrain, Kuwait, Qatar, Saudi Arabia and United Arab Emirates (UAE) taken on March 4, 2016.
Of the 26 GCC banks affected, the long-term ratings and/or the Counterparty Risk Assessments of 25 banks domiciled in Bahrain (five banks), Kuwait (two), Qatar (two), Saudi Arabia (11) and UAE (five) were placed under review for downgrade, while the long-term ratings of one other Bahraini bank were affirmed and assigned a negative outlook.
The review for downgrade on the long-term supported ratings and/or Counterparty Risk Assessments of the 25 banks is in line with the review for downgrade on their sovereigns, which reflects the potential weakening capacity of these governments to help banks in times of stress, prompting a re-assessment of our high support assumptions incorporated in the GCC banks’ ratings.
At the same time, the baseline credit assessments (BCAs) of 15 of these GCC banks have also been placed under review for downgrade to reflect: (1) the broader negative effects of weaker economic activity and consumption, triggered by reductions in public spending, on profitability and asset quality; and (2) the more pressured and costly funding environment driven by the reduced inflows of government-related liquidity. It should be noted that while the broad drivers remain the same across the GCC, the specific impact of these various factors vary according to systems and the bank itself.
For four of the Bahraini banks, certain ratings were also downgraded before being placed on review for further downgrade, triggered by: (1) the Bahraini authorities’ weakened fiscal capacity to support the local banks; and (2) foreign currency transfer and convertibility risks, as reflected by the downgrade of the Bahraini sovereign to Ba1 from Baa3, and its placement on review for downgrade on March 4, 2016.
As part of the same rating action, Moody’s has affirmed the long-term ratings and BCAs of two Bahraini banks while changing the outlook on their long-term ratings–one to stable from positive, and the other to negative from stable.