Are GCC banks prepared to absorb further loan loss shocks?

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GCC-rated banks, which set aside $ 10.9 billion in new loan loss provisions in 2020 amid the pandemic and low oil prices, have the capacity to absorb a further shock of up to $ 45 billion.

S&P Global Ratings estimates that GCC-rated banks can absorb a total shock of $ 31-45 billion with limited automatic effect on capitalization valuation.

The rating agency expects banks’ asset quality indicators to continue to deteriorate and the cost of risk to remain high as they begin to recognize the true impact of 2020 and the forbearance measures. are lifted in the second half of 2021.

According to S&P, the greatest absolute loss absorbing capacity lies with Saudi banks, which dominate the pack due to their size. In relation to total loans, Kuwaiti banks stand out for their large provisions accumulated over the years.

“At the end of 2020, the total loans of the banks in our sample were around $ 1 trillion. It should be noted that these aggregate figures do not reveal any significant differences between banks. Likewise, the numbers do not necessarily speak to the potential movement of ratings as they only cover a narrow angle of bank credit histories – although they do provide valuable information for our analysis, ”S&P said in its“ Scenarios stress: How will GCC banks fare amid potential new shocks from Covid-19, ”the S&P report said.

According to rating agency Fitch, GCC banks are expected to face persistent asset quality risks, leading to increased loan write-downs and high provisions, putting pressure on profitability in 2021. The rating agency noted that extended loan deferral programs only postponed asset quality issues.

“Extending borrower support measures will limit short-term pressure on asset quality, delaying recognition of Phase 3 loans until 2021. Nonetheless, asset quality measures could weaken significantly. in 2021-2022 once the support measures are withdrawn, “said Redmond Ramsdale, Middle East bank ratings manager at Fitch.

Moody’s said in a report that the 2021 outlook for GCC banks is driven by moderate economic growth, continued business disruption linked to the coronavirus outbreak, and tax consolidation that is straining quality and profitability. loans.

Loan performance will be under pressure as the moderate growth of the non-hydrocarbon economy weighs on borrowers’ loan repayment capacity. Loan repayment holidays as part of the Covid19 pandemic measures have so far kept non-performing loans low, but we expect them to increase.

The S&P report noted that there remains high, albeit moderate, uncertainty about the course of the coronavirus pandemic and its economic effects.

“Vaccine production is accelerating and deployments are accelerating around the world. Widespread vaccination, which will help pave the way for a return to more normal levels of social and economic activity, appears to be achievable by most developed economies by the end of the third quarter. “

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