GCC banks to focus on consolidation as economies reel from COVID-19, low oil prices

Regional banks' growth opportunities are constrained, shifting focus to cost discipline and consolidation

  
A Saudi money changer counts U.S banknotes at a currency exchange shop in Riyadh, Saudi Arabia September 29, 2016. Image used for illustrative purpose.

A Saudi money changer counts U.S banknotes at a currency exchange shop in Riyadh, Saudi Arabia September 29, 2016. Image used for illustrative purpose.

REUTERS/Faisal Al Nasser

Banks in the Gulf Cooperation Council (GCC) will increase merger and acquisitions as growth is constrained by the difficult economic climate, shifting focus to cost discipline and consolidation, said Moody’s.

The dual impact of the low oil price and the global pandemic are affecting the profitability of GCC banks, meaning merger deals will be motivated purely by financial considerations, the ratings agency said.

 “The banks now face larger cost adjustments as low oil prices and the coronavirus fallout constrain growth opportunities and severely dent their profitability,” said Badis Shubailat, analyst at Moody’s. “This is prompting a new wave of mergers as banks seek ways to combat revenue pressure.”

In its report, published today, Moody’s said bank consolidation in the GCC region has so far largely involved shareholders consolidating their positions in different banks amid weakening operating conditions.

Pressures building from the oil price and pandemic shocks will increasingly drive purely financially driven transactions, particularly among smaller banks crowded out by larger competitors, it continued.

“Operating efficiency will be key to maintaining profitability. The twin challenges of the pandemic and protracted low oil prices will hit banks’ profitability through slower credit growth, slimmer net interest margins and higher provisioning for bad loans,” the report said, adding that mergers and acquisitions will remain a recurring credit theme over coming years.

(Writing by Imogen Lillywhite; editing by Seban Scaria)

(imogen.lillywhite@refinitiv.com)

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