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Pandemic costs GCC banks $10.9bn in new provisions

21 Mar 2021

Over the past 12 months, the GCC banks have set aside US$10.9bn of additional loan-loss provisions for the expected negative impact of the COVID-19 pandemic and drop in oil prices on their economies, S&P Global Ratings said on Sunday.

The global ratings agency expects more provisions at GCC banks in 2021 as regulatory forbearance measures are lifted by the regulators and banks recognise the full impact of the shock.

Despite the regulatory forbearance measures, which allowed banks to smoothen the profitability hit, cost of risk for rated banks increased by almost two-thirds – reaching 150 basis points (bps) at year-end 2020 compared with 90 bps at year-end 2019, S&P Global Ratings said in a report.

‘Some banks were exposed to specific one-off default cases. Others, simply decided to err on the side of caution and took provisions to prepare for the lifting of regulatory forbearance measures, which would almost certainly crystallise some risks.’

‘Although we expects forbearance measures to be lifted in 2021, the process should be smooth, with regulators unlikely to take major steps that could endanger the financial health of their banking systems, in our view,’ S&P Global Ratings said.

Furthermore, the ratings agency noted that, despite an increase in cost of risk, most GCC banks remain profitable and only a few showed statutory losses in 2020, either due to high exposure to vulnerable asset classes or management’s conservative stance in dealing with the shock aftermath. GCC banks’ high contribution of net interest income to total revenue, hefty margins, and sound operating efficiency have also helped their performance, it added.

S&P Global Ratings believes that the COVID-19 pandemic will continue to dominate the credit story for GCC banks this year, as part of the wider narrative for emerging markets.

‘In our view, vaccine rollouts and exceptionally accommodative monetary policy from developed market central banks will support recovery and financing conditions for emerging markets, excluding a major shift in investor sentiment. However, we still expect the asset-quality indicators of banks in emerging markets to weaken, with the GCC no exception,’ the ratings agency said.

“Overall, we estimate that rated GCC banks in our sample can absorb a shock of US$31bn-US$45bn (in aggregate) with a limited automatic effect on our assessment of capitalisation. This rises to US$114bn when banks hit the boundaries for a potentially weaker assessment of capital and earnings under our criteria and corresponds to a 3.1-11.3 per cent increase in their non-performing loans,” said S&P Global Ratings’ credit analyst Mohamed Damak.

The largest absolute capacity to absorb losses, he said, lies with Saudi banks, which dominate the pack due to their size. When compared with total lending, Kuwait’s banks stand out given their significant provisions accumulated over the years.

“We expect banks’ asset-quality indicators will continue to deteriorate and cost of risk to remain high as they start recognizing the true impact of 2020 and forbearance measures are lifted in second-half 2021,” Damak added.

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