The strong earning capacity of banks in the GCC countries will help them navigate the shock related to COVID-19 and the oil price dive, and protect their hybrid capital instruments, S&P Global Ratings said in two reports published on Wednesday.
“Most rated GCC banks have relatively strong profitability and a conservative approach to calculating and setting aside loan-loss provisions,” said S&P Global Ratings credit analyst Mohamed Damak.
“Overall, we estimate that rated GCC banks could absorb up to a US$36bn shock before starting to deplete their capital base. This corresponds to about three-times our calculated normalised losses, which implies a substantial level of stress in our view,” Damak added.
“As we see the COVID-19 pandemic and the drop in oil price as a profitability event rather than a capital event, we do not foresee that banks will systematically skip the payment of coupons on their hybrid instruments or write down the principal amount,” stressed Damak.
Some issuers already proactively refinanced some instruments approaching their first call date in 2020, benefiting from the then-supportive market conditions.
“We therefore expect such issuers to call the instruments unless the regulator prevents them from doing so or the banks’ decide to extend call dates. For others, the decision to call or not to call their instruments in 2020 will be purely motivated by such a move’s economic impact on the bank,” Damak added.
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