Rated banks in the Gulf can absorb up to a $36 billion shock before depleting their capital bases, S&P Global Ratings said on Sunday, adding that banks in Bahrain, Oman and the United Arab Emirates are the most vulnerable to increases in cost of risk.
The ratings agency said the relatively strong profits of the region’s rated banks and loan-loss provisions will help them weather the double shock of the coronavirus pandemic and the collapse of oil prices.
The $36 billion shock that S&P estimates banks can absorb is about three times the agency’s calculated normalized losses, “which implies a substantial level of stress,” it said.
S&P said it expected banks’ profitability to suffer in 2020 due to the pandemic and low oil prices.
“This is because financing growth will remain limited, with banks focusing more on preserving their asset-quality indicators than generating new business,” it said, adding it expected asset quality will deteriorate and cost of risk would rise.
S&P assumed COVID-19, the disease caused by the new coronavirus, will be contained and non-oil activity will resume by the third quarter. If not, banks’ profitability will suffer further and some will see losses, it said.
“In our view, the support measures enacted by GCC governments will at best delay this problem, in the absence of additional measures,” it said, though it added banks’ low cost base and potential new cost-saving measures next year could benefit them.
While some banks have taken measures to preserve their workforces, job cuts “will probably come next year if the environment doesn’t improve,” S&P said.
S&P said Saudi banks are the most resilient, while Kuwait has the highest capacity to withstand higher cost of risk and Bahrain, Oman and UAE are the most vulnerable to such costs.
It added that the $36 billion figure is not evenly distributed. A few banks have more capacity to absorb losses than others, which is not correlated with the lender’s size.
Coronavirus: Gulf hotel performers hanging by a thread after tourism shutdown
Gulf companies should stop hiding away from discussing coronavirus impact
Coronavirus: Gulf countries pledge over $120 bln stimulus to combat fallout
Coronavirus: Gulf hotel performers hanging by a thread after tourism shutdownWith the live music industry suspended indefinitely due to the ongoing coronavirus pandemic, the region’s musicians who previously relied on ... Entertainment
Gulf companies should stop hiding away from discussing coronavirus impactThe coronavirus pandemic has revealed a major divergence between companies in the Arabian Gulf and their peers around the world, and the divergence is ... Coronavirus
Coronavirus: Gulf countries pledge over $120 bln stimulus to combat falloutSix members of the Gulf Cooperation Council have pledged over $120 billion to help their economies fight the impact of the coronavirus, officially ... Features