Moody’s stated that the GCC banks are at risk of a deteriorating operating environment that has the potential to directly affect the quality of assets and profitability when the current Iran conflict keeps on escalating.
In its recent report, the ratings agency indicated that there is also the likelihood of a prolonged conflict that would strain capital buffers and adversely impact the credit ratings of GCC banks in the process.
Moody’s said, “In our baseline scenario, we expect limited solvency pressure, which will maintain capital broadly stable.”
Moody’s reported that a prolonged interruption of oil and gas exports in the area would strain business confidence and the non-oil economy overall, in which GCC banks make money lending, especially to the areas of commerce, transport, property, building, and tourism.
Oil prices rose by 25 percent on Monday to their highest levels since mid-2022. Brent crude was trading at $107.39 per barrel at 0800 am GMT as the Iran war caused a disruption in global energy supplies.
Tankers no longer transiting through the Strait of Hormuz, which is an important piece of waterway that is utilized by the important oil exporters such as the UAE, Saudi Arabia, Kuwait, Qatar, Iraq, and Iran.
Any extended disturbance of the energy trade flows, even outside its baseline scenario, may cause diminished investor confidence and macroeconomic conditions more generally, increasing the risk levels of banks.
“The primary risk transmission channel would be through banks’ operational and liquidity risks,” Moody’s said, citing that, despite a few temporary outages in online banking platforms due to damaged facilities, banks are maintaining business continuity plans.
Liquidity concerns, despite GCC banks, might increase the conflict in case the conflict exceeds its baseline scenario, Moody’s stated, adding that “systems with higher reliance on less stable and external funding would face greater refinancing risks.”
Traditionally, GCC banks have mostly been financed through the stable deposits of clients, and this category of liabilities comprises approximately three-quarters of non-equity liabilities.
Moody’s emphasized that “In addition, deposit concentrations to local governments and public-sector entities, albeit high, have shown a strong track record as stable depositors even in turbulent times – such as the oil crisis in 2015 and the COVID-19 outbreak – limiting the risk of deposits runoff.”
The rating agency pointed out that the GCC banks have sufficient liquidity buffers to such a risk, with core banking liquidity between 13 percent and 23 percent of the tangible banking assets, mostly cash and cash equivalents, and highly rated sovereign-issued government securities.
