Banks in the six-nation Gulf Cooperation Council (GCC) are being increasingly challenged by a liquidity squeeze resulting from low oil prices, Moody's Investor Services said on Monday.
A sustained loss in oil revenue is likely to reduce government and government-related deposits in banks and could eventually reduce state support for the banking system, the ratings agency said.
Government willingness and capacity to support GCC banks has played a key role in sustaining their credit growth, asset quality and loss-absorbing buffers, it said.
"The widening gap between low oil prices and high government spending policies could have increasingly negative credit implications for the banks," Moody's said.
The national budgets of GCC states in 2016 indicate a slowdown in economic growth accompanied by large fiscal deficits, it said.
World oil prices have dropped by more than 70 percent since June 2014. Oil income normally contributed 80 to 90 percent to GCC public revenues.
"We anticipate banks will be pressured by a further softening of their operating environment and the potential for reduced willingness or capacity of governments to provide support," Moody's said.
In the past few decades, GCC governments have shown a consistent record of intervention to avoid losses to creditors and depositors through direct capital injections and official guarantees, it said.
"Lower government financial reserves, however, could lead to a shift in policy towards more selective support," the agency said.
So far, the most visible impact of lower oil prices on GCC banks has been a tightening in liquidity due to significantly reduced deposit inflows from government and government-related entities.
The squeeze in liquidity is already pushing banks to compete more aggressively for deposits and tap public markets, thereby increasing funding costs and impacting profitability.
A sharp slowdown in public spending will also negatively impact loan growth and corporate earnings, Moody's said.
GCC states -- Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates -- are estimated to have lost $300 billion in revenues last year due to low oil price.
Last week, the London-based Capital Economics said the slump in oil revenue was unlikely to cause any major problem for Gulf banks which are well-placed to deal with a rise in bad debts.
It said deposits withdrawn by governments from banks to plug budget deficits were being used in domestic spending with part of it going back to the banking system through the private sector.