Both Islamic and conventional GCC banks' profitability will take a hit in 2020, the note said. This is because financing growth will remain limited, with banks focusing more on preserving their asset-quality indicators than generating new business amid the COVID-19 pandemic.
Slowdown in lending growth:
For 2020, S&P expects slower organic and nonorganic growth, with Islamic and conventional banks seeing similar rates of 2 percent-3 percent.
With the significant decline in oil prices (to an average of $30 per barrel for 2020, down from $60 at the start of the year) and government measures to contain the spread of COVID-19, nonoil growth is set to decline, resulting in fewer growth opportunities for banks.
If the measures implemented by the GCC governments to contain COVID-19 continue for longer, the effect on their economies and banking systems would be stronger than currently forecast, the report warned.
This risk is exacerbated by delays or cancellations of important events scheduled in the region.
“The delay of Expo 2020 for Dubai and cancellation of the pilgrimage season for Saudi Arabia, for example, now depend on the spread and containment of COVID-19. If either event is cancelled, the impact on regional economies could be stronger than we currently expect and further increase risks for banks,” it said.
Asset quality and cost of risk:
Furthermore, asset quality is expected to deteriorate and cost of risk to increase in 2020.
At year-end 2019, the average nonperforming financing (NPF) ratio reached 2.8 percent for Islamic banks and 3 percent for conventional banks. The coverage ratios were at 155.5 percent for Islamic and 154.6 percent for conventional banks.
For 2020 NPF ratios could easily double, and cost of risk could reach 1.5 -2.0 percent of total loans, the agency said.
Islamic banks are somewhat more vulnerable because they tend to have higher exposure to the real estate sector due to the asset backing principle inherent to Islamic finance. Furthermore, they cannot charge late payment fees, so clients tend to prioritize payments to conventional banks.
While the funding profile of Islamic and conventional banks also remained stable, the ratings agency has noted two main risks in 2020.
Government and government-related entity (GRE) deposits account for 10-35 percent of total deposits. These entities might burn cash as the drop in oil prices and less supportive economic environment affect their activities.
The second risk relates to deposits outflows once the pandemic is contained. Some expatriates might increase remittances to their home countries.
UAE banks among most exposed
Banks in the UAE, Oman and Bahrain are the most exposed to risk, according to S&P.
“We continue to believe that, in case of need, the federal authorities will intervene and support banks in the UAE.”
For Oman and Bahrain, the lack of capacity to support the banking system means that these governments would need to prioritize the allocation of their limited financial resources if the shock is stronger than expected.
Second wave of M&A
Finally, when the dust settles and the full effect on banks' financials is visible, there could be a second wave of mergers and acquisitions (M&A).
The first wave was spurred by shareholders' desire to reorganize their assets. The second wave will be more opportunistic and driven by economic rationale and might involve consolidation across different GCC countries or within emirates in the UAE.
(Writing by Brinda Darasha, editing by Seban Scaria)
#GCC #Banking #Oil #Coronavirus #Economy
Disclaimer: This article is provided for informational purposes only. The content does not provide tax, legal or investment advice or opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Read our full disclaimer policy here.
© ZAWYA 2020