NPL ratios set to surge as GCC central banks roll back relief measures

The non-performing loan (NPL) ratios of GCC banks are expected to surge in the next 12-24 months as central banks gradually withdraw forbearance measures and the pandemic’s impact on weaker businesses are laid bare, analysts at S&P Global Ratings said.

“We expect the NPL ratio to rise in the next 12-24 months without exceeding 5-6 per cent compared with 3.8 per cent as on June 30 2021 as forbearance measures are gradually withdrawn,” say S&P analysts Mohamed Damak and Zeina Nasreddine.

However, they also expect the GCC economies to expand at an unweighted average of 1.8 per cent in 2021 and four per cent in 2022, in part facilitated by increased credit growth. “These factors underpin our expectations for average regional cost of risk to decline in 2021 and start to normalize from 2022,” Damak and Nasreddine wrote in a report titled “GCC banks hope the worst is over as the recovery begins.”

Saudi Arabia will be an exception, with continuing strong lending growth, driven primarily by mortgages and to some extent the implementation of Vision 2030 investments. In contrast, cost of risk is likely to remain high in the UAE, despite the extension of the central bank’s Targeted Economic Support Scheme (TESS), they said.

“Dubai’s hosting of Expo 2020 and other factors will improve economic sentiment, but it is unclear if this will continue when the event ends in March 2022,” S&P analysts said.

Lending growth in the UAE remained muted at about 0.6 per cent, with some banks’ lending books reducing in the first half. “We expect a slight acceleration in lending in the second-half of 2021 as UAE economic sentiment continues to improve, especially with the start of Expo 2020.”

S&P analysts expect GCC banks’ profitability to stabilise in 2021-2022 after an improvement in first-half 2021. Lower cost of risk and good efficiency--with an average cost to income of 38 per cent in first-half 2021--will likely compensate for a lower but stable margin of 2.4 per cent over the same period.

Return on assets of GCC banks will also stabilise at 1.0 per cent-1.2 per cent, below historical levels but higher than the 0.8 per cent for the top 45 banks in the region last year. In our view, banks will continue to leverage fintech opportunities, move staff to cheaper locations, and cut physical branches to reduce costs.

Kamco Invest, an investment bank, reported that GCC banks continued to post robust growth in lending activity as economic recovery gathered pace during the second quarter resulting in record high loan books of $1.68 trillion.

Gross loans of listed banks in the GCC at the end of the quarter jumped 4.6 per cent q-o-q and 7.1 per cent y-o-y, after a broad-based growth seen in all the markets, Kamco Invest said in its GCC Banking Report.

Total bank revenue for GCC banks increased by 3.5 per cent q-o-q during Q2-2021 after seeing a decline during the previous quarter. The increase in Q2-2021 was mainly led by higher net interest income that was partially offset by a decline in noninterest income.

S&P Global Ratings believes GCC banks have demonstrated resilience to the Covid-19-related economic shock and last year’s sharp decline in oil prices.

“Western and regional central banks’ unprecedented interventions, which took the form of liquidity injections and regulatory forbearance measures, helped cushion regional banks from wider uncertainty and masked the true hit to their asset quality indicators,” the report noted.

However, a gradual recovery in private sector economic activity, supportive public sector demand for credit, and higher oil prices (an average of $75 per barrel [/bbl] in 2021 and $65/bbl in 2022) have also helped amortize the impact on banks, S&P report said.

— issacjohn@khaleejtimes.com