As per the S&P report, few of the banks will be posting out huge losses within this year in 2021, with the risk cost budging higher based on high provisions.
As per the statement provided by the Gulf Cooperation Council (GCC) as well as the global rating agency, the recovery will be gradual all in all due to the preceding year’s huge recession projected in through COVID-19’s Pandemic as well as lower oil-based rates.
The S&P global ratings stated within its latest report stated that: “We see long-lasting adverse effects from the 2020 shock on GCC economies and banking sectors. Saudi and Qatar’s banking sectors will be less impacted than those in the United Arab Emirates (UAE), Oman, and Bahrain, while in Kuwait the story will depend on the evolution of the fiscal impasse.”
There is no doubt that the economic recovery is definitely there on cards, with the roll out of Dubai Expo 2020, Doha football world cup etc in 2022, as well as recovery due to hydrocarbon, green sector recovery, it will however, still remain below the historical levels. It also stated that, indeed, most countries will not return to 2019 nominal GDP before 2023, with an even bitter road for Saudi Arabia.
Few of the banks will post shrinkage in 2021, the report stated. Banks grieved a triple shock to effectiveness in 2020 from curbing lending expansion, lower-for-longer interest rates, and huge cost of risk.
Cost of risk will endure to be raised following a hurdle of 60 percent in 2020 as banks set aside provisions in preparation for more stress.
On the economy visible, real GDP tapered sharply in 2020 due to lower oil budgets and as well as significant COVID-19-related collapse in the hospitality, commerce, and real estate sectors. “We imagine oil prices will average $60 for 2021 and 2022 and sustained advancement on vaccine rollouts but view the downside risks from further virus waves.”
Although vaccination plans are enduring, recovery of the aviation and hospitality sectors will take time, with likely noteworthy shortcoming risks from further waves and transformations of the virus. “We suppose a weak recovery of global air travel in 2021-2022.”
Mandate for GCC real estate will endure subdued given continued negative investment sentiment, it noted. “Although we have realized a significant decline in new launches in Dubai, we still suppose the supply overhang to limit any short-to-medium-term recovery,” the report stated.
While there is no foremost modification between Islamic and conventional banking in the GCC because both models endure focused on the real economy, the “nonappearance of late payment fees and higher acquaintance to the real estate sector could put Islamic banks at a weakness.”
Loan progress will remain muted across the territory, except Qatar and Saudi Arabia. In Saudi, mortgage lending lingers to expand due to the authorities’ objective of growing home ownership, while in Qatar government projects are advancing evolution. Demand from corporates will likely improve only slightly, with some deferred 2020 capital expenditure and debt refinancing potentially occurring this year.
“We expect banks’ asset-quality indicators will remain to depreciate and cost of risk to remain high as they start distinguishing the true impact of 2020 and forbearance measures are lifted in second-half 2021.
While there is no major alteration between Islamic and conventional banking in the GCC because both models remain intensive on the real economy, the “absence of late payment fees and higher exposure to the real estate sector could put Islamic banks at a disadvantage.”
Given sustained low interest rates, banks’ profitability will remain small in 2021 and beyond, with approximately hypothetically showing losses in 2021. Robust and stable capital barriers, good funding profiles, and anticipated government funding should linger to aid the banks’ creditworthiness in 2021.
