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GCC banks remain resilient despite economic challenges

Dubai: The GCC’s banking system has been resilient despite the long-term economic impact of COVID-19 and low oil prices, according to analysts and rating agencies.

GCC banks are well capitalized and with low default performance (NPLs) until June 2020. However, vulnerabilities could lead to rising NPLs by the end of this year and in 2021, especially if a repeat of the pandemic forces the reopening of controls, or if oil prices fall below $ 40 / b for more than a few months, ”said Garbis Iradian, chief economist at Mena of the Institute of International Finance.

The profitability of the regional banks came under pressure due to rising COVID-related provision for loan losses, shrinking margins due to the low interest rate environment and delayed loan growth due to economic contraction due to the pandemic and low oil prices.

Press profit

A recent analysis of the performance of the GCC banks by KPMG showed that the overall net profit of GCC banks was a decrease of 34.7 percent in the first half of 2020, compared to the first half of 2019.

There was a sharp increase in supply with an increase of 76.8 percent in the ECL [expected credit loss] levy recorded by the GCC banks in H1 2020 compared to H1 2019. The report also showed credit losses on loans and advances for the UAE banks higher than expected, with top 10 ban figures showing an increase of 125.8 percent in credit losses recorded in H1 2020. The quality of credit exposures also deteriorated, leading to an increase in the loan ratio from 3.8 percent on 31 December 2019 to 4.1 percent on 30 June 2020 for the top banks of the VAE.

The rating agencies said the profits of the GCC bank would remain under pressure due to the growth in the economies and the slow recovery. Recent economic forecasts by the International Monetary Fund and the IIF indicated slower-than-expected economic recovery for the region next year.

Moody’s forecast an average 20 percent drop in GCC bank profits for the full year. ‘We estimate that lower core revenues and an increase in supply will lead to an average drop in annual profit of more than 20 per cent for our GCC-rated banks and a moderate weakening of their efficiency levels, although remaining healthy compared to global standards, ”said Badis Shubailat, an analyst at Moody’s.

Consolidation

The rating agency said fewer business opportunities, coupled with shrinking margins, were expected to drive bank management in the GCC to seek more cost-effective operations that are expected to bring more consolidation to the sector, sparking rumors of merger talks between First Abu Dhabi Bank (FAB) cause. ) and Abu Dhabi Islamic Bank which was officially rejected by FAB.

Moody’s expects oil price pressures and pandemic shocks to drive increasingly purely financially driven M&A transactions, especially among smaller banks pressured by larger competitors.

Stakeholders focus on stability, solvency and liquidity. It remains to be seen whether this will cause another wave of mergers and acquisitions in the region’s banking sector, ”said Abbas Basrai, partner and head of financial services at KPMG Lower Gulf.

Sound funding and capitalization

Although the banks across the region are well capitalized, they have strong and stable sources of financing. According to data from Standard & Poor’s, GCC banks with a strong capitalization by international standards show an unweighted average Tier 1 ratio of 17.2 percent as at 30 June 2020. This ratio has been fairly stable over the past three years, but According to S&P, it will decrease slightly in 2020 and 2021 as the operating environment hinders the profitability of banks.

S&P considers funding to be a relative strength of most GCC banking systems. “Core deposits are the main source of funding for GCC banks and we do not anticipate any change in the next few years,” said Mohamed Damak, senior director and world head of Islamic Finance, Financial Services Research, S&P.

Source: Gulf News

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