Banks in the GCC region will see profits fall this year as economies shrink amid the coronavirus outbreak and lower oil prices but have adequate capital underpinning their solvency, Moody’s Investors Service said in a report.
All six GCC countries will experience sharp economic contraction as they suffer the combined effect of the coronavirus pandemic and a plunge in oil prices.
The pandemic has hit hotels and restaurants, airlines, automotive industries, real estate, trade, tourism and retail sectors in particular, with small and mid-sized enterprises being the most vulnerable.
Moody’s expects real non-hydrocarbon GDP in the GCC to contract between 3.5 per cent and 5pc in 2020.
UAE and Bahrain have the largest non-oil sectors relative to the size of the economy and will likely be impacted the most.
The economic contraction in the non-hydrocarbon economy will translate into significantly reduced banking activity.
“The economies of all six GCC countries will contract, sapping the banks’ two main income streams – interest on loans, and fees and commissions – while provisioning charges for loan losses will rise sharply,” said Nitish Bhojnagarwala, vice-president and senior credit officer at Moody’s.
“The banks’ capital will remain adequate, however, underpinning their solvency.”
The banks will feel the effects through rising non-performing loans, requiring higher provisioning charges.
Stimulus packages launched by GCC governments will ease, but not fully offset, the burden on borrowers.
Both lending demand and lending appetite among banks will dry up resulting in an average lending contraction of between zero to 5pc for the rated GCC banks during 2020 from a 7pc growth in 2019.
Simultaneously, interest rate cuts and rising customer defaults will reduce banks’ interest income, while funding costs will increase moderately.
“Economic recession will weigh on the creditworthiness of both corporate and household borrowers,” said Mr Bhojnagarwala.
“The banks will feel the effects through rising non-performing loans, requiring higher provisioning charges, which are expected to increase significantly from $11.7 billion recorded for Moody’s rated banks for 2019.”
GCC banks rated by Moody’s delivered aggregate net income of around $34.7bn in 2019, providing a cushion to absorb losses.
Higher provisions and lower-income will result in an average decline in full-year net profit of more than 20pc, said the report.
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