GCC banks to see long-term adverse effects from 2020 shocks

The Gulf Cooperation Council (GCC) states will be slow to recover from last year’s sharp recession triggered by the COVID-19 pandemic and low oil prices, according to a global ratings agency.

“We see long-lasting adverse effects from the 2020 shock on GCC economies and banking sectors. Saudi and Qatar's banking sectors will be less impacted than those in the United Arab Emirates (UAE), Oman, and Bahrain, while in Kuwait the story will depend on the evolution of the fiscal impasse,” the S&P Global Ratings said in a new report.

Some banks will post losses in 2021, the report said. Banks suffered a triple shock to profitability in 2020 from lower lending growth, lower-for-longer interest rates, and higher cost of risk. Cost of risk will remain elevated following a jump of 60 percent in 2020 as banks set aside provisions in preparation for more stress.

On the economy front, real GDP contracted sharply in 2020 because of low oil prices and a significant COVID-19-related slump in the hospitality, commerce, and real estate sectors. “We expect oil prices will average $60 for 2021 and 2022 and continued progress on vaccine rollouts but see downside risks from further virus waves.”

Dubai Expo 2020 and the football World Cup in Doha in 2022, as well as hydrocarbon sector recovery, will boost economic growth but it will remain below historical levels. Indeed, most countries will not return to 2019 nominal GDP before 2023, with an even longer road for Saudi Arabia, it said.

Although vaccination programs are progressing, recovery of the aviation and hospitality sectors will take time, with likely significant downside risks from further waves and mutations of the virus. “We expect a weak recovery of global air travel in 2021-2022.”

Demand for GCC real estate will remain subdued given continued negative investment sentiment, it noted. “Although we have seen a significant decline in new launches in Dubai, we still expect the supply overhang to limit any short-to-medium-term recovery,” the report said.

Loan growth will remain muted across the region, except Qatar and Saudi Arabia. In Saudi, mortgage lending continues to expand due to the authorities’ objective of increasing home ownership, while in Qatar government projects are boosting growth. Demand from corporates will likely improve only slightly, with some deferred 2020 capital expenditure and debt refinancing potentially occurring this year.

“We expect 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.

While there is no major difference between Islamic and conventional banking in the GCC because both models remain focused on the real economy, the “absence of late payment fees and higher exposure to the real estate sector could put Islamic banks at a disadvantage.”

Given continued low interest rates, banks’ profitability will remain low in 2021 and beyond, with some potentially showing losses in 2021.

Strong and stable capital buffers, good funding profiles, and expected government support should continue to support banks' creditworthiness in 2021.

 

Source: https://www.zawya.com/mena/en/economy/story/GCC_banks_to_see_longterm_adverse_effects_from_2020_shocks-ZAWYA20210314073953/

 

 

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