S&P Report: GCC Banks Face Slow Recovery From Recession

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Banks in the Gulf Cooperation Council (GCC) countries will see long-lasting adverse effects from last year’s recession triggered by the Covid-19 crisis and low oil prices, a S&P Global Ratings report has warned.

Gross domestic product (GDP) contracted sharply in 2020 due to a sink in crude prices and a significant Covid-19-related slump in the hospitality, commerce and real estate sectors.

The credit rating agency’s GCC Banking Sector: A Long Climb To Recovery report suggests GCC banks will be constrained by the protracted recovery in key economic sectors and low interest rates for some time.

Mohamed Damak, S&P Global Ratings credit analyst, said: “We expect banks’ asset-quality indicators will continue to deteriorate and cost of risk to remain high as they start recognising the true impact of 2020 and forbearance measures are lifted in second-half 2021.

“That said, strong and stable capital buffers, good funding profiles, and expected government support should continue to support banks’ creditworthiness in 2021.”

Road to recovery

Banks suffered a triple shock to profitability in 2020 from lower lending growth, lower-for-longer interest rates and higher cost of risk. With low interest rates, banks’ profitability will remain low in 2021 and beyond, with some potentially showing losses in 2021.

However, strong and stable capital buffers, good funding profiles and expected government support should  support banks’ creditworthiness in 2021.

Dubai Expo 2020 and the football World Cup in Doha in 2022, as well as hydrocarbon sector recovery, will drive economic growth but it will remain below historical levels. The report suggests some countries will not return to 2019 nominal GDP before 2023, with an even longer road for Saudi Arabia

Saudi and Qatar’s banking sectors will be less impacted than those in the United Arab Emirates, Oman and Bahrain, while in Kuwait the story will depend on the evolution of the fiscal deadlock.

Although vaccination programmes are progressing, recovery of the aviation and hospitality sectors will take time, with likely significant downside risks from further waves and mutations of the virus warns S&P.

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