GCC banks’ operating performance will remain constrained by the protracted recovery in key economic sectors and low interest rates despite the recent rally in oil prices and brighter near-term outlook, according to S&P Global Ratings.
In a new research note, S&P said it expects GDP growth in the Gulf countries will slowly recover from last year’s sharp recession triggered by the Covid-19 pandemic and low oil prices.
However, the ratings agency added that it sees long-lasting adverse effects from the 2020 shock on GCC economies and banking sectors.
Over the past 12 months, GCC banks have set aside $10.9 billion of additional credit loss provisions for the expected negative impact of the Covid-19 pandemic and drop in oil prices on their economies.
Saudi and Qatar’s banking sectors will be less affected than those in the UAE, Oman, and Bahrain, while in Kuwait the story will depend on the evolution of the fiscal impasse, S&P said.
“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. Given continued low interest rates, banks’ profitability will remain low in 2021 and beyond, with some potentially showing losses this year, analysts noted.
“Nevertheless, strong, and stable capital buffers, good funding profiles, and expected government support should continue to reinforce banks’ creditworthiness in 2021, S&P added.
S&P said it believes that the Covid-19 pandemic will continue to dominate the credit story for Gulf banks this year, as part of the wider narrative for emerging markets (EMs).
“In our view, vaccine rollouts and exceptionally accommodative monetary policy from developed market central banks will support recovery and financing conditions for EMs, excluding a major shift in investor sentiment. However, we still expect the asset-quality indicators of banks in EMs to weaken, with the GCC no exception,” the research note added.
S&P estimates that rated banks can absorb a shock of between $31 billion and $114 billion (in aggregate) depending on the impact of non-performing loans with the largest capacity to absorb losses lying 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 year, it added.
Last month, data released by Boston Consulting Group showed that revenue growth for banks operating in the Gulf region until 2024 will be subdued, even in the most optimistic scenario.
Compared to the previous five years, which saw GCC banks increase their revenues by a compound annual growth rate (CAGR) of 5.5 percent, the best they can expect to 2024 is 1.6 percent, BCG said.
While retail banks have reacted to the Covid-19 crisis with speed, dexterity, and purpose, further challenges await in their quest to enhance revenues, upgrade digital capabilities, and build a strong, stable future, it added.
In a quick-rebound scenario, revenues are estimated to grow from $26.4 billion in 2019 to $28.6 billion in 2024.
However in a slow-recovery scenario, revenues are expected to shrink by a CAGR of -0.1 percent to $26.3 billion while in a deeper-impact scenario, the revenue pool is projected to shrink by a CAGR of -2.1 percent.
“The pandemic has taken a toll on the retail banking sector, and we believe that a slow-recovery scenario is most likely to occur for GCC retail banks,” said Godfrey Sullivan, managing director and partner, BCG.
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