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Gulf banks can absorb up to $36B shock

Issac John /Dubai Filed on May 10, 2020 | Last updated on May 10, 2020 at 10.03 pm
Most rated Gulf banks have relatively strong profitability and a conservative approach to calculating and setting aside loan-loss provisions.

(File photo)

23 GCC banks have assets worth $1.5T at end- 2019 and are among most profitable worldwide

Despite facing deterioration in profitability in 2020 because of the dual shock of Covid-19 and the decline in oil prices, GCC banks could absorb up to a $36 billion shock in additional credit losses before starting to deplete their capital base, a leading ratings agency said.

On average, rated GCC banks can absorb 2.7 times of the normalised losses, but this masks a significant level of difference between banks, according to S&P Global Ratings.

"Most rated Gulf banks have relatively strong profitability and a conservative approach to calculating and setting aside loan-loss provisions. With regional banks adopting a relatively cautious attitude toward the quality of their investment portfolios, S&P Global Ratings' view is that many stand to benefit from capital gains due to the shift in market conditions," S&P said.

The ratings agency said thanks to large proportions of noninterest-bearing deposits and sustainable sources of fee income and high operational efficiency - with generous provision cushions built over recent years that will help them navigate the current economic rough waters - rated regional banks are highly profitable.

The 23 GCC banks rated by the agency had assets worth $1.5 trillion at the end of 2019 and are among the most profitable in the world.

S&P expects that financing growth will remain limited, with banks focusing more on preserving their asset-quality indicators than generating new business.

Additionally, the interest margin will decline, given the reduction in interest rates and the structure of rated GCC banks' funding profiles coupled with an expectation of depreciated asset quality and increase in cost of risk.

"Looking at the coverage level using profitability only, the most resilient are the Saudi banks and the least resilient are Bahraini banks due to the economic shocks and the limited capacity of the government to support the banks. Factoring the additional excess or shortfall provisions, Kuwaiti banks have the highest capacity to resist any increase in cost of risk and Bahrain, Oman, and the UAE are the most exposed in the current crisis because of their high exposure to the real estate sector," it said.

However, GCC banks will continue to benefit from their relatively low-cost base and potential additional cost-saving initiatives from 2021. "Investment revenue is also likely to support the bottom line of some banks this year as the drop in interest rates increases the market value of these instruments and banks decide to offload them, thereby realizing gains. Credit losses could take up to three years to flow through financial statement, the credit profiles of GCC banks are set to weaken due to the pandemic and lower oil prices despite unprecedented economic stimulus packages worth hundreds of billions of dollars.

Responding to the pandemic crisis induced lock down, GCC governments were quick to announce stimulus packages to mitigate its economic impact. While the UAE announced Dh282 billion, other countries came out with generous stimulus packages. Saudi Arabia announced $56.5 billion, Qatar $20.6 billion in addition to government entities having been directed to increase investments in the domestic stock market by $2.75 billion, Oman $20.8 billion Bahrain $11.4 billion and Kuwait $16.5 billion.

In sum, the region's governments announced a total of more than $200 billion. "The vast majority of the stimulus is through monetary and macro-prudential measures. This is over 25 per cent of GDP for Bahrain and Oman, over 15 per cent for the UAE, over 10 per cent for Qatar and Kuwait and 7 per cent for Saudi Arabia."

Moody's has said a sizeable cut in interest rate would reduce UAE banks' net interest margins because gross yields earned on loans will decline more than the funding cost paid on deposits, and because the rate cut is unlikely to materially increase credit volumes in the current difficult operating environment.



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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