Gulf banks can absorb up to $36B shock

dubai — Despite facing deterioration in profitability in 2020 because of the dual shock of Covid-19 and the decline in oil prices, GCC banks could absorb up to a $36 billion shock in additional credit losses before starting to deplete their capital base, a leading ratings agency said.

On average, rated GCC banks can absorb 2.7 times of the normalised losses, but this masks a significant level of difference between banks, according to S&P Global Ratings.

“Most rated Gulf banks have relatively strong profitability and a conservative approach to calculating and setting aside loanloss provisions. With regional banks adopting a relatively cautious attitude toward the quality of their investment portfolios, S&P Global Ratings’ view is that many stand to benefit from capital gains due to the shift in market conditions,”

S&P said.

The ratings agency said thanks to large proportions of noninterestbearing deposits and sustainable sources of fee income and high operational efficiency — with generous provision cushions built over recent years that will help them navigate the current economic rough waters — rated regional banks are highly profitable.

The 23 GCC banks rated by the agency had assets worth $1.5 trillion at the end of 2019 and are among the most profitable in the world.

S&P expects that financing growth will remain limited, with banks focusing more on preserving their asset-quality indicators than generating new business.

Additionally, the interest margin will decline, given the reduction in interest rates and the structure of rated GCC banks’ funding profiles coupled with an expectation of depreciated asset quality and increase in cost of risk.