Profitability of GCC banks will continue to stabilise in H2 2021: S&P

UAE is most vulnerable to headwinds, but government support is helping to mitigate effects

  
Hands of bank officer calculating loans. Image used for illustrative purpose.

Hands of bank officer calculating loans. Image used for illustrative purpose.

Getty Images

The profitability of banks across the Gulf Cooperation Council (GCC) has stabilised and will continue to do so for the rest of the year, according to a recent report from S&P Global Ratings.

The Gulf states are mitigating the economic impact of COVID-19, thanks to the high cost of risk and stable interest margin, as well as the government support and improving economic sentiment. 

“Overall, GCC banks’ profitability stabilised in first-half 2021 due to still-high cost of risk and stable interest margins. In the absence of further shocks – pandemic or non-pandemic related – we expect this to continue in second-half 2021, aided by careful cost control,” S&P said in its report. 

GCC banks’ capitalisation is also expected to remain supportive of their creditworthiness, the ratings agency said, although it raised concerns about the banking system in some states, including the UAE, which has high exposure to real estate and hard-hit sectors. 

Government efforts help

“Among the four country banking sectors we profiled, we believe the most vulnerable is the United Arab Emirates (UAE), where the pandemic disrupted important economic sectors such as the hospitality, trade and already-weak real estate sector,” said S&P Global Ratings credit analyst Zeina Nasreddine. 

“However, this was largely mitigated by the government’s Targeted Economic Support Scheme (TESS), which offered breathing room to corporates hit by the pandemic and reduced costs for banks by providing free funding.” 

The economic support measure, which has targeted individuals and companies affected by COVID-19, has been extended until June 2022. With this, S&P said, the UAE’s banking system is now expected to amortise the impact of the pandemic over a longer period. 

The International Monetary Fund (IMF) has forecast that the UAE economy will grow 3.1 percent this year, up from the previous forecast of 1.3 percent in October 2020. 

In Qatar, the state’s support measures have also helped cushion the impact of the pandemic on the banking system. However, S&P said it remains concerned about the banking system’s build-up of external debt. 

“That said, we take comfort from the government’s highly supportive stand toward its banking system,” S&P said. 

Among the GCC states, S&P said it considers Saudi Arabia “the least vulnerable” in the current environment. 

Banks in the kingdom are expected to continue to benefit from mortgage growth and the implementation of Vision 2030. 

In Kuwait, S&P said it is concerned about the government’s capacity to strike a deal with the parliament to fund its fiscal deficit. 

“In the absence of such a solution and disruptive government expenditure adjustments, the hit to the economy and banking sector could have deeply adverse implications for financial stability,” the agency said. 

“This could also lead us to question our current expectations of government support to the banking sector in case of need.” 

(Writing by Cleofe Maceda; editing by Seban Scaria) 

Cleofe.maceda@refinitiv.com 

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 2021

More From Financial Services