Fitch Ratings is maintaining its stable outlook for Arabian Gulf Islamic banks, which will be buoyed by economic growth propelled by higher oil prices that will spur credit expansion.

Sharia-compliant banks will remain profitable, well capitalised and supported by Gulf governments, the rating agency said in a report.

“Fitch has stable outlooks on all rated Islamic banks in the GCC. This predominantly reflects stable state ability to provide support to domestic Islamic banks,” said the rating agency. “Credit growth will remain weak at about 5 per cent – still above financing growth at conventional banks – and will increase from 2018 levels in most countries.”

Gulf banks are posting higher profits this year compared to 2017 thanks to economic expansion led by the recovery in oil prices. Lenders are also consolidating to improve their profit margins, cut costs and compete regionally, beyond their local market.

Islamic banks just like their conventional peers are benefiting from the improvement in the regional economy.

“Most Islamic banks will benefit from rising rates due to their large proportions of non profit-bearing deposits,” said Fitch. “Nevertheless, the larger branch networks for the size of their franchises result in higher costs. Funding costs are expected to be less pressured due to higher liquidity in the system.”

All Gulf countries, except for Kuwait, peg their currencies to the dollar and mimic the US Fed interest rates hikes. The Fed is expected to increase rates for the fourth time this month when it meets.

“We expect liquidity to remain strong. We expect capital levels to remain mostly unchanged in 2019,” Fitch said. “Earnings will remain high, benefiting from increasing interest rates in most countries.”

Islamic banks are also benefiting from sukuk issuances from governments, which sometimes sell Sharia-compliant bonds to finance their fiscal deficit. For example, Saudi Arabia launched last year a riyal-denominated sukuk programme that has helped Islamic banks.

“Government issuance and subsequent liquidity injections in the banking systems will continue to support solid liquidity in the region,” said Fitch. “Nevertheless, lower deposit growth will put pressure on the ability to lend, although this will be partially offset by lower demand.”

Source The National