GCC banks begin post-pandemic recovery — S&P
IMPROVING ECONOMIC CONDITIONS SUPPORTIVE OF SECTOR REBOUND
GCC banks have begun their recovery from the unprecedented shock from Covid-19 pandemic, according to rating agency Standard & Poor’s.
While the central banks’ unprecedented interventions, which took the form of liquidity injections and regulatory forbearance measures, helped cushion uncertainty during the crisis, the rating agency said improving economic conditions are supportive of banking sector recovery.
Asset quality
A gradual recovery in private sector economic activity, supportive public sector demand for credit, and higher oil prices have also helped amortise the impact on banks. In turn, non performing loan (NPL) ratios increased only 20 basis points (bps) for the top GCC 45 banks between year-end 2020 and June 30, 2021,” S&P said in a note.
The rating agency expects the NPL ratio to rise in the next 12-24 months without exceeding 5 per cent to 6 per cent, compared with 3.8 per cent at June 30, 2021, as forbearance measures are gradually withdrawn.
However, S&P said, as GCC economies recover and expand at a projected average of 1.8 per cent in 2021 and 4 per cent in 2022, the average regional cost of risk is expected to decline in 2021 and start to normalise from 2022.
Profitability
GCC bank’s profitability is expected to stabilise in 2021-22
“Lower cost of risk and good efficiency — with an average cost to income of 38 per cent in first-half 2021 — will likely compensate for a lower but stable margin of 2.4 per cent over the same period,” said Mohammed Damak, Senior Director within the Financial Services at S&P Global Ratings.
Return on assets are also expected to stabilise at 1 per cent to 2 per cent, below historical levels but higher than the 0.8 per cent for the top 45 banks in the region last year.
Lending growth
Lending growth across the GCC banking sectors have picked up this year.
“GCC banks in our sample saw lending growth accelerate slightly in first-half 2021 to an annualised 8.4 per cent, compared with 6.6 per cent in 2020, due to higher oil prices and improving economic sentiment,” said Zeina Nasreddine an analyst at S&P. Saudi Arabia continued to drive loan growth in GCC with lending up 7.9 per cent in the first half.
“We expect this to continue since mortgage production remains strong and we see some corporate lending activity. Lending growth in the UAE remained muted at about 0.6 per cent, with some banks’ lending books reducing in the first half. We expect a slight acceleration in lending in second-half 2021 as UAE economic sentiment continues to improve, especially with the start of Expo 2020,” said Nasreddine.