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The GCC banks' strong earning capacity will help them navigate the shocks related to COVID-19 and oil price drops, S&P Global Ratings said in a note.
"Most rated GCC banks have relatively strong profitability and a conservative approach to calculating and setting aside loan-loss provisions," S&P Global Ratings credit analyst Mohamed Damak said.
"Overall, we estimate that rated GCC banks could absorb up to a $36 billion shock before starting to deplete their capital base. This corresponds to about 3x our calculated normalized losses, which implies a substantial level of stress in our view," Damak added.
S&P’s study was based on a sample of 23 rated commercial banks in the GCC with exposures predominantly concentrated in GCC countries. At year-end 2019, these banks' total assets reached $1.5 trillion.
Rated GCC banks are highly profitable according to the ratings agency. Three factors explain the strong structural profitability:
- A large portion of non-interest-bearing deposits, which explains why banks' margins are hefty (at year-end 2019, rated GCC banks' net interest margin stood at 2.9 percent)
- Non-interest revenue mainly comes from sustainable sources of income such as fees and commissions with limited contribution of volatile market-related income.
- Banks' efficiency is very strong
S&P anticipates banks' profitability will deteriorate in 2020 because of the drop-in oil prices and the coronavirus outbreak.
“This is because financing growth will remain limited, with banks focusing more on preserving their asset-quality indicators than generating new business,” Damak said.
GCC countries have introduced a number of measures to contain the coronavirus outbreak and residents are being urged to stay indoors, as the number of cases in the Gulf exceeded 30,000 on Wednesday.
Oil prices have been trading near historical lows this week on slower demand, despite OPEC+ agreeing earlier in April to cut their output by 9.7 million barrels per day (bpd) for May-June. Brent prices fell below $20 a barrel on Tuesday.
S&P anticipates interest margin for GCC banks will decline in 2020, asset quality will deteriorate, and cost of risk will increase.
“In our view, the support measures enacted by GCC governments will at best delay this problem, in the absence of additional measures. However, we believe banks will continue to benefit from their relatively low-cost base and potential additional cost-saving initiatives from 2021,” Damak said.
“Some banks announced employment-preservation measures for 2020 but cuts will probably come next year if the environment doesn't improve,” Damak added.
S&P’s assumption is that COVID-19 containment and the resumption of non-oil activity will occur by the third-quarter of 2020.
“Should this take longer, it would mean lower profitability and even losses for some banks,” Damak said.
(Writing by Gerard Aoun, editing by Seban Scaria)
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