UAE banks loan loss provisions surge 71.6% to $8.2bln

Banks in the UAE booked the biggest spike in loan loss provisions in the GCC with an increase of $3.4 billion or 71.6 per cent to reach $8.2 billion in 2020 as the total LLP recorded across the region reached an all-time high of $20.3 billion.

The banking industry was amongst the sectors that reported a decline in profits during 2020. The sector’s $11.8 billion fall in net profits was led by higher provisions booked by banks across the region as bad loans increased during the year due to the pandemic, according to GCC Corporate Earnings Report by Kamco Invest.

On the other hand, Saudi Arabian banks booked the lowest percentage increase in LLP at 37.6 per cent or $1.3 billion to reach $4.6 billion during the year. Banks in the region set aside $6.4 billion for doubtful credit during Q4-2020, the highest for a quarter ever recorded in the region.

According to Moody’s, the four biggest UAE banks reported a 43 per cent jump in bad loan provisions in 2020. The ratings agency expects UAE banks’ profitability to remain under pressure in 2021 as provisions increase further. “Although the four banks’ loan loss buffers remain solid, we expect higher provisioning during 2021 due to further asset quality deterioration.”

Rated GCC banks, which had set aside $10.9 billion of new loan-loss provisions in 2020 in the backdrop of the pandemic and low oil prices, have the capacity to absorb a further shock of up to $45 billion, S&P Global Ratings said in a recent analysis. The ratings agency estimates that rated banks in the GCC can absorb a shock of $31 billion-$45 billion in aggregate with a limited automatic effect on the assessment of capitalisation.

Overall, corporate profits across the GCC plummeted to a five-year low to $91.3 billion, down 39.3 per cent as compared to $150.5 billion during 2019, due to the devastating impact of the pandemic on the regional economy, said Kamco Invest.

The $59.2 billion plunge in profits came mainly on the back of decline in profits for Aramco - by $38.9 billion or 44.1 per cent year on year. Banking, real estate and materials sectors across the region also contributed to the decline.

The three sectors accounted for 85 per cent of the decline in net profits for 2020, when excluding net profits for Aramco, said the report.

Sectors that showed noticeable increase in net profits during the year were utilities and food, beverage & tobacco sectors that remained resilient during the pandemic due to their defensive nature.

“Out of the 21 sectors on the stock exchanges, 12 sectors witnessed y-o-y decline in profits whereas gainers only reported marginal growth. At the exchange level, Abu Dhabi reported the smallest decline in profits during the year at 7.4 per cent followed by Oman and Qatar with declines of 18.6 per cent and 20.5 per cent respectively. In terms of quarterly performance, net profits during Q4-2020 declined by 21.6 per cent y-o-y to $25 billion as compared to $31.9 billion during Q4-19,” Kamco report said.

The energy sector once again reported the steepest decline of $6.2 billion in net profits or 30.8 per cent y-o-y followed by Banks and Real Estate with profits declines of 23.8 per cent and 94.9 per cent respectively. On the other hand, the Utilities sector reported the biggest y-o-y growth in profits, said the report.

In the energy sector, the 44 per cent drop in profits for Aramco was sparked by the historic decline in crude oil prices during H1, 2020 in addition to decline in volumes sold as well as weak refining and chemical margins.

“The trend was similar for the bulk of the companies in the sector with 14 out of 21 companies in the GCC energy sector reporting a decline in net profits during 2020,” Kamco report said.

Similarly, the two-third decline in profits for the materials sector was led by companies related to the energy industry. Sabic reported the biggest decline in profits in the sector after the company’s profits shrunk by $1.4 billion to $17.8 million in 2020 due to a decline in topline that was affected by a decline in demand for chemical products.

In the real estate sector, which reported the third biggest decline in profits during 2020, results were mainly affected by the loss in rental income as a result of the Covid-19 restrictions imposed by the governments across the region during the year, said the report.