GDP growth in Gulf countries will slowly recover from last year's sharp recession
Since the beginning of the pandemic, GCC banks have set aside $10.9bn of additional credit loss provisions for the expected negative impact of the Covid19 pandemic and drop in oil prices on their economies.
We believe that the Covid-19 pandemic will continue to dominate the credit story for Gulf Cooperation Council (GCC) banks this year as well. In 2020, despite an increase in cost of risk, most rated banks remained profitable and only a few showed statutory losses, either due to high exposure to vulnerable asset classes or management's conservative stance in dealing with the shock aftermath.
Furthermore, the GCC banks' high contribution of net interest income to total revenue, hefty margins, and sound operating efficiency have also helped their performance.
In the near term, we expect that the Gulf states vaccination drive and exceptionally accommodative monetary policy from developed market central banks will support recovery and financing conditions, excluding a major shift in investor sentiment.
However, we still expect the asset-quality indicators of banks in the GCC to weaken. S&P recently conducted two simulations of the credit losses rated banks can absorb under different scenarios - one focusing on banks' profitability and excess provisions on existing nonperforming loans and one considering buffers exceeding our riskadjusted capital thresholds from a ratings perspective.
The simulation results suggest that the rated banks' capacity to absorb losses varies significantly.
Overall, we estimate that rated banks in the GCC can absorb a shock of $31bn-$45bn (in aggregate) with a limited automatic effect on our assessment of capitalisation.
This rises to $114bn when banks hit the boundaries for a potentially weaker assessment of capital and earnings under our criteria and corresponds to a 3.1 per cent-11.3 per cent increase in their non-performing loans (NPLs). Saudi Arabia represents 40 per cent-50 per cent of these numbers given Saudi banks are the largest contributor in our sample.
They are followed by Qatari banks, but this is instead due to their strong profitability and capitalisation, with Kuwaiti banks the third largest contributor. Bahrain and Oman's marginal contribution is explained by the limited number of rated banks in each country, while for the UAE in fourth, it is explained by the lower starting point for the coverage ratio. When adding the capitalisation angle, credit loss absorption capacity increases significantly and the GCC banks tend to have strong capitalisation, which will help them navigate the stressed operating environment.
Despite the recent rally in oil prices and brighter near-term outlook for economic recovery, GCC banks' operating performance will remain constrained by the protracted recovery in key economic sectors and low interest rates. In our previous GCC Banking Sector report 'A long climb to recovery', we have indicated that economic recovery from the coronavirus crisis in the oil-rich Gulf region will be slow.