“Banks have reduced their risk appetite and limited their activity to either recycling the liquidity injected by their respective central banks, or honouring their committed credit lines. We believe that lower lending growth will continue in 2021, at about five percent for most countries, due to the protracted economic recovery, wrote S&P analysts in the report.
However, for the GCC banks, the glimmer of hope lies with an expected COVID-19 vaccine by mid-2021 and a forecast that the oil price will stabilize at an average of $50 per barrel, they said.
Also, on the positive side, most GCC banks have good funding profiles and strong capitalisation that should support their creditworthiness in 2020-2021, the report said.
With an exception of Saudi Arabia, where mortgages have been expanding rapidly on the back of a government initiative to increase home ownership in the country, the lending growth in the GCC will be flat, it said, adding GCC banks' profitability will also continue to decline with a few lenders reporting losses because of their exposure to high-risk asset classes - such as small-to-midsize enterprises (SMEs) and credit cards - or in few instances, because of under-provisioning.
Impact on Islamic banks
The picture differs slightly for Islamic banks, compared with conventional counterparts. Having looked at the credit fundamentals of the 16 largest Islamic banks and 30 largest conventional banks in the GCC, S&P considers that Islamic banks might prove less resilient to a protracted downturn than their conventional peers.
“Islamic banks tend to have greater exposure to the real estate sector due to the asset-backing principle inherent to Islamic finance, and also such banks cannot charge late payment fees, unless they donate them to charity, meaning that their clients tend to prioritise payments on conventional loans over Islamic financings,” said the report explaining the risks for Islamic banks.
The real estate has been the preferred form of a collateral, but its value has been declining for most of the GCC markets over the past three years.
Nevertheless, the COVID-19 pandemic and lower oil price could mark the start of a new era for banks in the GCC. Beyond S&P’s two-year outlook horizon, analysts expect banks' reduced profitability to be structural due to lower-for-longer interest rates, weaker lending growth, and the significant proportion of noninterest-bearing deposits in banks' funding profiles.
Consolidation of the banking sector
The recent merger of Saudi Arabia’s National Commercial Bank and Samba Financial Group is just a beginning. The S&P report foresees a second wave of mergers and acquisitions (M&A) when the full impact of the weaker operating environment on banks becomes apparent.
The first wave of M&A was driven by shareholders' desire to reorganize their assets, but the second wave will be more opportunistic and driven by economic rationale, it said. “The operating environment might push some banks to find a stronger shareholder or to join forces with other banks to enhance their resilience. This might involve consolidation across the different GCC countries or the different emirates in the UAE, for example,” said the report.
(Writing by Syed Atique Naqvi; editing by Seban Scaria)
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