Dual Shock: COVID-19, low oil price to hit GCC banks' profitability - Moody's

Narrower margins and contraction in lending will pressure revenue, according to the global ratings agency

A 3D printed oil pump jack is placed on dollar banknotes in this illustration picture, April 14, 2020.

A 3D printed oil pump jack is placed on dollar banknotes in this illustration picture, April 14, 2020.

REUTERS/Dado Ruvic/Illustration

The dual shock from the coronavirus pandemic (COVID-19) and the collapse in oil prices will severely dent profits at banks in the Gulf Cooperation Council (GCC) countries this year. Economic contraction across all six GCC nations will depress credit growth and sap the banks' two main income streams; interest on loans, and fees and commissions, Moody's said in a note.

Provisioning charges for potential loan losses are expected to rise sharply. The Gulf banks' capital will remain adequate, however, underpinning their solvency. Narrower margins and contraction in lending will pressure revenue, the global ratings agency reported.

"We expect real non-hydrocarbon GDP in the GCC to contract between 3.5 percent and 5 percent in 2020. This will erode loan demand and banks' appetite to lend, resulting in an average loan contraction between 0 percent and 5 percent. Simultaneously, interest rate cuts and rising customer defaults will reduce banks' interest income, while funding costs will increase moderately," said Moody’s.

"Combined, these factors will narrow net interest margins. Increased government debt issuance (both bonds and sukuks) particularly in Saudi Arabia, Bahrain and Oman will help to offset the margin pressure as banks increase their exposure to these higher yielding instruments," the ratings agency said.

The pandemic has hit hotels, restaurants, airlines, automotive industries, real estate, trade, tourism and retail sectors in particular, with small- and mid-sized enterprises being the most vulnerable.

According to Moody's, the banks will feel the effects through rising nonperforming loans, requiring higher provisioning charges. Stimulus packages launched by the GCC governments will ease, but not fully offset, the burden on borrowers.

Moody's rated GCC banks delivered aggregate net income of around $34.7 billion in 2019, providing a cushion to absorb losses. "Higher provisions and lower income will result in an average decline in full-year net profit of more than 20 percent. Consequently, capital may dip slightly but will remain adequate as a lower asset base and low dividend payouts will offset weaker profit, underpinning the solvency profile of the GCC banks. Good provisioning coverage for systems like Kuwait, Qatar and Saudi Arabia will provide an additional cushion," Moody's noted.

On June 19, Moody’s changed its outlook to negative from stable for eight banks in the UAE amid the coronavirus outbreak.

The eight banks are Emirates NBD, Abu Dhabi Commercial Bank, Dubai Islamic Bank, Mashreq Bank, HSBC Bank Middle East, Abu Dhabi Islamic Bank, The National Bank of Ras al-Khaimah and National Bank of Fujairah.

Moody’s affirmed the banks’ ratings but said the change of outlook reflected “the potential material weakening in their standalone credit profiles, amid a challenging operating environment in the UAE due to the coronavirus outbreak, low oil prices and pre-existing economic challenges”.

(Reporting by Seban Scaria; Editing by Mily Chakrabarty)



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