S&P: GCC Banks Supported By Strong Capitalisation in 2020

Published April 7th, 2020 - 12:30 GMT
S&P: GCC Banks Supported By Strong Capitalisation in 2020
the government of Qatar and its related entities injected up to $42.5 billion in 2017 to help the banking system deal with boycott-related outflows,” the report said. (Shutterstock)
Highlights
GCC governments have not hesitated to rescue banks, as shareholders, or to safeguard the financial stability of their banking systems, the report said.

The strong capitalisation by international standards will continue to support the creditworthiness of GCC banks in 2020, S&P Global Ratings has said in a report released on Monday.

“GCC Islamic and conventional banks continue to display strong capitalisation by international standards with an unweighted average Tier 1 ratio of 17.9 percent for Islamic banks and 16.6 percent for conventional banks at year-end 2019. After dropping in 2018, this ratio increased slightly in 2019 as some banks raised new capital in the form of Tier 1 instruments before the market turmoil. Under our base-case scenario, we expect capitalisation to continue to support the creditworthiness of GCC banks in 2020,” S&P said in the report.

GCC governments have not hesitated to rescue banks, as shareholders, or to safeguard the financial stability of their banking systems, the report said.
“We take comfort from the GCC government’s strong capacity and willingness to provide the sector with support in case of need. For example, the government of Qatar and its related entities injected up to $42.5 billion in 2017 to help the banking system deal with boycott-related outflows,” the report said.

In response to the COVID-19 pandemic, it said, GCC governments have announced several measures to help corporates and retailers navigate the challenging environment.
“Some governments have opted for reduced taxes and levies. Other have asked banks to extend additional subsidised loans to affected clients to maintain employment and avoid production capacity destruction during what is expected to be a short-term event,” it said.

Measures implemented by Qatar include announcement of a QR 75 billion package targeting SMEs and affected sectors six-month exemptions on utilities payments (water and electricity) and rent payments for logistics areas and SMEs, and the exemption of food and medical goods from customs duties for six months. The Qatar Central Bank (QCB) lowered its policy rates by 100 bps-175 bps, depending on the rate, and said that it will provide additional liquidity to banks operating in the country.

The QCB has put in place mechanisms to encourage banks to postpone loan instalments and obligations of the private sector with a grace period of six months. The Qatar

Development Bank will postpone instalments of all borrowers for six months.
Furthermore, the report said, government funds have been directed to increase investments in the stock market by QAR10 billion.

The report, however, said, “We note risks related to deposits outflows once the COVID-19 pandemic is contained and the full effect on employment is known. Some expatriates might increase remittances to their home countries.”

Despite this pressure, it said, “We continue to take comfort from GCC banks’ good liquidity indicators. Banks’ funding profiles remain a strength in most GCC countries.”
“When the dust settles and the full effect of current conditions on banks’ financials is visible, we think there could be a second wave of mergers and acquisitions (M&A). The first wave was spurred by shareholders’ desire to reorganise their assets. The second wave will be more opportunistic and driven by economic rationale. The current environment might push some banks to find a stronger shareholder or join forces with peers to enhance resilience,” the report said.


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