Rated GCC banks could absorb up to a $36bn shock in additional credit losses before starting to deplete their capital base. This corresponds to 2.7x the average normalized losses for the sector in the region reflecting substantial levels of stress according to S&P Global Ratings.
Regional banks are highly profitable - due to large proportions of noninterest-bearing deposits, sustainable sources of fee income and high operational efficiency - with generous provision cushions built over recent years that will help them navigate the current economic rough waters. Most rated Gulf banks have relatively strong profitability and a conservative approach to calculating and setting aside loan-loss provisions.
With rated regional banks adopting a relatively cautious attitude toward the quality of their investment portfolios, S&P Global Ratings’ view is that many stand to benefit from capital gains due to the shift in market conditions. On average, GCC banks can absorb 2.7x normalized losses (the expected average or ‘normal’ level of annual credit losses, calculated by S&P based on an economic cycle of 12 years including three years of recession), but this masks a significant level of difference between banks.
Factoring the additional excess or shortfall provisions, Kuwaiti banks have the highest capacity to resist any increase in cost of risk and Bahrain, Oman, and the UAE are the most exposed in the current crisis because of their high exposure to the real estate sector. S&P Global Ratings anticipates that the banks’ profitability will deteriorate in 2020, because of the dual shock of COVID-19 and the decline in oil prices. The ratings firm expects that financing growth will remain limited, with banks focusing more on preserving their assetquality indicators than generating new business.
Additionally, the interest margin will decline, given the reduction in interest rates and the structure of rated GCC banks’ funding profiles coupled with an expectation of depreciated asset quality and increase in cost of risk. Looking ahead, the banks will continue to benefit from their relatively low-cost base and potential additional costsaving initiatives from 2021. Investment revenue is also likely to support the bottom line of some banks this year as the drop in interest rates increases the market value of these instruments and banks decide to offload them, thereby realizing gains.
Credit losses could take up to three years to flow through financial statements given regulatory forbearance measures. S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and the rating agency is using this assumption in assessing the economic and credit implications.
