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With $34.7b net profit, GCC banks well-placed to absorb losses: Moody's

Issac John /Dubai Filed on July 6, 2020


Banks in the GCC region will see profits fall this year as economies shrink amid the coronavirus outbreak and lower oil prices, but have adequate capital underpinning their solvency, Moody's Investors Service said in a report on Monday.

GCC banks rated by Moody's have a cushion to absorb losses thanks to their aggregate net income of around $34.7 billion in 2019, said the report.

"The economies of all six GCC countries will contract, sapping the banks' two main income streams - interest on loans, and fees and commissions - while provisioning charges for loan losses will rise sharply," said Nitish Bhojnagarwala, VP-senior credit officer at Moody's. "The banks' capital will remain adequate, however, underpinning their solvency."

"Economic recession will weigh on the creditworthiness of both corporate and household borrowers," said Bhojnagarwala. "Banks will feel the effects through rising non performing loans, requiring higher provisioning charges, which are expected to increase significantly from $11.7 billion recorded for Moody's rated banks for 2019."

The GCC region may see a second wave of bank mergers and acquisitions that will be driven by economic rationale in the post Covid-19 era, according to S&P Global.

The pandemic lockdown will halt the growth of GCC Islamic and conventional banks this year as they focus on preserving asset quality rather than business expansion.

Even months before the epidemic outbreak, the GCC banking sector was undergoing a major consolidation phase with 20 banks negotiating mergers and acquisitions with an estimated $1 trillion worth of assets.

The top 10 banks in the GCC grew their assets by 1.7 per cent during the quarter accounting for 53.3 per cent of the total GCC banking sector assets. Saudi Arabia followed the UAE with total assets at $607 billion or 27.8 per cent at the end of Q1-19, although the quarter on quarter growth in the UAE and Saudi Arabia were marginal at 1.3 per cent and 0.4 per cent, respectively," Kamco, a subsidiary of United Gulf Bank said.

The UAE continues to boast the biggest share of total listed bank assets in the GCC at $682 billion or 31.3 per cent of the total GCC banking assets, Kamco said.

GCC banks rated by Moody's delivered aggregate net income of around $34.7 billion in 2019, providing a cushion to absorb losses. Higher provisions and lower income will result in an average decline in full-year net profit of more than 20 per cent. Good provisioning coverage for systems such as Kuwait, Qatar and Saudi Arabia will provide an additional cushion. Consequently, capital may dip slightly but will remain sufficient amid a lower asset base and low dividend payouts.

Moody's expects real non-hydrocarbon GDP in the GCC to contract between 3.5 per cent and 5.0 per cent in 2020. This will erode loan demand and banks' appetite to lend, resulting in an average loan contraction between zero and 5.0 per cent. Simultaneously, interest rate cuts and rising customer defaults will reduce banks' interest income, while funding costs will increase moderately.




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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