‘GCC banks will be forced to cancel dividends this year’
‘Will survive but profitability low’
KUWAIT CITY, May 19: Analysts at S&P credit ratings agency suggested that banks in the Gulf Cooperation Council (GCC) countries will be forced to cancel dividends for the current year, with profits declining due to the repercussions of the effects of the coronavirus, indicating that this may lead to the emergence of a new wave of mergers in the long term, reports Al-Rai daily.
“It is unlikely that lenders in the region will need additional capital in the event of high loan defaults, despite facing the headwinds related to the impact of the coronavirus and low oil prices,” the agency said in a report.
According to S&P, 23 the GCC banks had assets totaling $1.5 trillion at the end of 2019, and can absorb up to $36 billion in additional provisions, before capital rules begin to erode.
For his part, the chief director and head of the global Islamic finance at the agency, Mohammad Damak, expected that Gulf banks will witness deterioration in asset quality indicators, due to the multiplication of bad loans during the current year, but he indicated that the capitalization of those banks will continue to support their ratings.
In turn, the head of the financial affairs division for the Middle East and North Africa and researcher in the shares of the EFG-Hermes group, Elena Sanchez, explained that Gulf banks are supposed to be able to lead the current situation in a relatively appropriate manner, indicating that the banks will be able to survive the current crisis, but that their profitability will decrease significantly, and in some cases they will have to cancel the distribution of profits during 2020.
According to the S&P report, the MSCI index for Gulf banks fell by 18.2 percent during the first four months of this year, compared to a 16 percent drop in broad Gulf indexes during the same time period, and according to the banks index on April 30. It provided a dividend yield of about 5.16 percent.
On the other hand, the agency estimated that credit losses take up to 3 years to appear in the budgets of Gulf banks, noting that on average, lenders in the region can absorb up to 2.7 times their normal losses, despite the existence of a large discrepancy between the banks covered by the ratings.
S&P indicated that Saudi banks are the most flexible in the face of these losses, unlike the Bahraini banks, which are the lowest in the region. In return, the agency emphasized that the large real estate exposure to Kuwaiti banks makes them more vulnerable to their counterparts in Qatar and the United Arab Emirates.