GCC banks face earnings shock from oil price drop and pandemic
MANAMA: Conventional and Islamic banks in the GCC will see significantly reduced revenue and credit growth in 2020, S&P Global Ratings has said.
The report titled ‘GCC Banks Face An Earnings Shock From The Oil Price Drop And COVID-19 Pandemic’ has been published on RatingsDirect.
“The sharp drop in oil prices and measures implemented by regional governments to contain transmission of the coronavirus (Covid-19) will take a toll on important sectors such as real estate, hospitality and consumer-related. Under our base-case scenario, we assume that these measures will be relatively short-lived and forecast a gradual recovery in non-oil activity from third quarter 2020,” said S&P Global Ratings credit analyst Mohamed Damak.
“However, the severe shock could cause irreparable damage to some parts of the non-oil economy. Furthermore, if the recovery takes longer than we expect, GCC banks could feel greater pressure,” Mr Damak added.
S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the outbreak.
Some government authorities estimate the pandemic will peak about midyear, and the agency is using this assumption in assessing the economic and credit implications.
S&P projects average real GDP growth for the six GCC countries to slightly accelerate in 2020 compared with 2019, but this will be primarily spurred by higher oil production.
With the significant decline in oil prices – the ratings agency’s assumption for 2020 is now an average of $30 per barrel, down from $60 at the start of the year – and government measures to contain the spread of COVID-19, non-oil growth is also seen declining.
This will result in fewer growth opportunities for banks.
S&P also expects banks to focus more on asset quality indicator preservation than generating new business.
In forecasts, it is assuming that measures implemented by GCC governments to contain Covid-19 are relatively short-lived.
Lower economic growth and significant shocks to vital economic sectors such as real estate, hospitality and consumption mean that GCC banks’ asset quality indicators (both Islamic and conventional) will deteriorate in 2020.
The agency feels Islamic banks are somewhat more vulnerable than their conventional peers.
This is because they tend to have higher exposure to the real estate sector due to the asset backing principle inherent to Islamic finance.
S&P anticipates that both Islamic and conventional GCC banks’ profitability will take a hit in 2020.
This is because financing growth will remain limited, with banks focusing more on preserving their asset quality indicators than generating new business amid the pandemic.
However, GCC Islamic and conventional banks included in its sample continue to display strong capitalisation by international standards, with an unweighted average Tier 1 ratio of 17.9 per cent for Islamic banks and 16.6pc for conventional banks at year-end 2019.
