GCC banks face ‘earnings shock’ from lower oil price, Covid-19: S&P
GCC banks will see significantly reduced revenue and credit growth in 2020 as they face an earnings shock from the oil price drop and Covid-19 pandemic, S&P Global Ratings said.
As the region’s lenders focus on preserving asset quality rather than business expansion, the pandemic will halt growth at both Islamic and conventional banks this year as the sharp decline in oil prices, accelerated real-estate price corrections in some markets, and drop in vital nonoil economic sectors will pressure banks’ earnings, the ratings agency said.
In its report, S&P said Islamic banks are likely to see a greater effect on asset-quality indicators “since they typically have a higher proportion of exposure to real estate and cannot charge late payment fees.
Stimulus and support measures from GCC governments will help banks navigate the challenging environment but likely not resolve structural problems unless we see stronger intervention.”
According to Moody’s, the immediate effect of a sustained period of lower oil prices would be on the liability side of the balance sheets due to reduced deposit inflows from government and government-related entities. ”
A prolonged period of low oil prices risks constraining existing public spending plans which will undermine confidence and pressure economic growth. Economic growth and consequently credit growth in the GCC has already slowed since oil prices began to moderate in 2014.
A more protracted period of lower prices will strain asset quality,” said Ashraf Madani, senior vice president and analyst at Moody’s.
Moody’s has said a sizable cut in interest rate would reduce UAE banks’ net interest margins) because gross yields earned on loans will decline more than the funding cost paid on deposits, and because the rate cut is unlikely to materially increase credit volumes in the current difficult operating environment.
In March, S&P revised its outlooks of some UAE banks including First Abu Dhabi Bank, Abu Dhabi Commercial Bank, Mashreqbank, Sharjah Islamic Bank and National Bank of Fujairah to negative, while affirming long- and short-term issuer credit ratings on these entities.
S&P said it expects a significant slowdown in lending growth in 2020. “Although growth rates last year were almost the same as 2018, GCC conventional banks saw faster increases than Islamic banks. “In 2020, we expect slower organic and nonorganic growth, with Islamic and conventional banks seeing similar rates of 2-3 per cent.
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