Business: GCC banks to remain resilient
BANKS IN THE REGION ARE WELL- CAPITALISED WITH STABLE FUNDING SOURCES, ANALYSTS SAY
The GCC’s banking system has been resilient despite the economic impact of Covid- 19 and low oil prices for a prolonged period, according to analysts and rating agencies.
“Well capitalised and with low non- performing loans ( NPLs) through June 2020 GCC banks remain strong. However, vulnerabilities may lead to rising NPLs towards the end of this year and in 2021, particularly if a recurrence of the pandemic forces the reimposition of containment measures or if oil prices drop well below $ 40 a barrel for more than a few months,” said Garbis Iradian, chief economist — Mena, at the Institute of International Finance.
The profitability of the region’s banks has come under pressure amid a rise in Covidrelated loan loss provisions, shrinking margins as a result of the low interest rate environment and slowing loan growth due to economic contraction resulting from the pandemic and low oil prices.
A recent analysis of the performance of GCC banks by KPMG showed the overall net profit of GCC banks witnessed a decline of 34.7 per cent in the first half of 2020 comparedwith the first half of 2019.
There has been a sharp rise in provision with an increase of 76.8 per cent in the ECL [ expected credit loss] charge recorded by the GCC banks in H1 2020, comparedwith H1 2019.
The report also showed higherthan- expected credit losses on loans and advances for the UAE banks with top 10 banks recording an increase of 125.8 per cent in credit losses in H1 2020. The quality of credit exposures has also deteriorated, resulting in an increase in the non- performing loan ratio from 3.8 per cent on 31 December, 2019 to 4.1 per cent on 30 June 2020, for the UAE’s top banks.
The rating agencies have said the profits of GCC banks will remain under pressure due to
growth contraction experienced by the economies and the slow pace of recovery. Recent economic forecasts by the International Monetary Fund and the IIF have indicated slower than anticipated economic recovery for the region next year.
Lower core income
Moody’s has forecast an average of 20per centdecline in fullyear profits of GCC banks. “We estimate that lower core income and a spike in provisioning will lead to an average drop in fullyear profits of more than 20 per cent for our GCCrated banks and a moderate weakening of their efficiency levels although those
remain sound when compared to global standards,” said Badis Shubailat, an Analyst at Moody’s.
Moody’s expect pressures building from the oil price and pandemic shocks will increasingly drive purely financially driven mergers and acquisitions transactions, particularly among smaller banks crowded out by larger competitors.
“Stakeholders’ focus is shifting towards stability, solvency, and liquidity. It remains to be seen whether this will trigger another wave of mergers and acquisitions in the region’s banking sector,” said Abbas Basrai, Partner and Head of Financial Services at KPMG Lower Gulf.
Moody’s expect pressures building will increasingly drive purely financially driven mergers and acquisitions transactions.