Are GCC banks ready to absorb further loan-loss shocks?

Issac John /Dubai Filed on March 21, 2021
A broker monitors stock prices on a screen at the Saudi Investment Bank in Riyadh. — Reuters file

S&P Global Ratings estimates that rated banks in the GCC can absorb a shock of $31 billion-$45 billion in aggregate with a limited automatic effect on the assessment of capitalisation

Rated GCC banks, which had set aside $10.9 billion of new loan-loss provisions in 2020 in the backdrop of the pandemic and low oil prices, have the capacity to absorb a further shock of up to $45 billion.

S&P Global Ratings estimates that rated banks in the GCC can absorb a shock of $31 billion-$45 billion in aggregate with a limited automatic effect on the assessment of capitalisation.

“This rises to $114 billion when banks hit the boundaries for a potentially weaker assessment of capital and earnings under our criteria and corresponds to a 3.1 per cent-11.3 per cent increase in their NPLs,” said S&P Global Ratings credit analyst Mohamed Damak.

The ratings agency expects banks’ asset-quality indicators will continue to deteriorate and cost of risk to remain high as they start recognizing the true impact of 2020 and forbearance measures are lifted in second-half 2021.

According to S&P, the largest absolute capacity to absorb losses lies with Saudi banks, which dominate the pack due to their size. When compared with total lending, Kuwait’s banks stand out given their significant provisions accumulated over the years.

“At year-end 2020, the total lending of banks in our sample was about $1.0 trillion. Of note, these aggregate numbers do not reveal important differences between banks. Equally, the figures do not necessarily speak to potential ratings movement because they cover only one narrow angle of banks’ credit stories--although they do provide valuable insights for our analysis,” S&P said in its “Stress scenarios: How GCC banks will perform amid further potential Covid-19 shocks,” said the S&P report.

According to rating agency Fitch, GCC banks are expected to face continued asset quality risks resulting in higher loan impairments and elevated provisions leading to strain on profitability in 2021. The rating agency noted that the prolonged loan deferral schemes have only postponed the asset quality issues.

“The extension of support measures for borrowers will limit short-term pressure on asset quality, delaying the recognition of Stage 3 loans well into 2021. Nevertheless, asset-quality metrics could weaken materially in 2021-2022 once support measures are withdrawn,” said Redmond Ramsdale, head of Middle East Bank Ratings at Fitch.

Moody’s said in a report that the 2021 outlook for GCC banks is driven by subdued economic growth, continued business disruption related to the coronavirus outbreak, and fiscal consolidation that is pressuring loan quality and profitability.

Loan performance will be under pressure as subdued growth in the non-hydrocarbon economy weighs on borrowers’ loan repayment capacity. Loan repayment holidays as part of measures to combat Covid19 pandemic have kept non-performing loans at low levels so far, but we expect these to rise.

The S&P report noted that there remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects.

“Vaccine production is ramping up and rollouts are gathering pace around the world. Widespread immunisation, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter.”



Issac John

Editorial Director of Khaleej Times, is a well-connected Indian journalist and an economic and financial commentator. He has been in the UAE's mainstream journalism for 35 years, including 23 years with Khaleej Times. A post-graduate in English and graduate in economics, he has won over two dozen awards. Acclaimed for his authentic and insightful analysis of global and regional businesses and economic trends, he is respected for his astute understanding of the local business scene.

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