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GCC banks demonstrated resilience to COVID-19 crisis: S&P

10 Oct 2021 S&P GCC banks By OUR CORRESPONDENT

Muscat – Banks in the GCC countries have demonstrated strong resilience to the COVID-19-related economic slowdown due to Gulf central banks’ unprecedented interventions, according to S&P Global Ratings.

The global ratings agency in a report said that banks in the GCC region hope the worst is over as the economic recovery has started.

‘We believe banks in the GCC have demonstrated resilience to the COVID-19-related economic shock and last year’s sharp decline in oil prices. Western and local central banks’ unprecedented interventions, which took the form of liquidity injections and regulatory forbearance measures, helped cushion regional banks from wider uncertainty and masked the true hit to their asset quality indicators,’ S&P said.

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 GCC banks, S&P added.

The ratings agency noted that non-performing loan (NPL) ratios increased only 20 basis points for the top 45 GCC banks between year-end 2020 and June 30, 2021.

‘We expect the NPL ratio to rise in the next 12-24 months without exceeding 5-6 per cent, compared with 3.8 per cent at June 30, 2021, as forbearance measures are gradually withdrawn and the pandemic’s impacts on weaker businesses are laid bare,’ S&P added.

After an improvement in the first-half of 2021, S&P expects GCC banks’ profitability to stabilise in 2021-2022. ‘Lower cost of risk and good efficiency will likely compensate for a lower but stable margin of 2.4 per cent over the same period. Return on assets will therefore also stabilise at 1.0-1.2 per cent, below historical levels but higher than the 0.8 per cent for the top 45 banks in the region last year.’

‘In our view, GCC banks will continue to leverage Fintech opportunities, move staff to cheaper locations, and cut physical branches to reduce costs,’ the ratings agency added.

S&P noted that 82 per cent of its outlooks on GCC bank ratings are stable at present, mirroring the banks’ resilience to the COVID-19 shock and an improving macroeconomic forecast.

‘Downside risks include a lower oil price than we expect, an escalation of geopolitical risks, and new pandemic concerns such as the emergence of more contagious or vaccine-resistant variants,’ it said.

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