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29 March 2020
INVESTMENT

Low oil prices, COVID-19 pose challenges to GCC banks’ stable outlook

The drop in oil prices and lower economic activity due to COVID-19 is expected lead to an increase in problem loans and the cost of risk for UAE banks in the next 12 to 24 months

S&P Global previously projected that GCC banks should maintain stable financial profiles in 2020 without any major increase in geopolitical risk or a sharp fall in oil prices

by Kudakwashe Muzoriwa

GCC rated banks face downward pressure on profitability and loan quality due to deteriorating operating conditions resulting from real estate sector, drop in oil prices and the impact of COVID-19 outbreak which is likely to result in revised outlooks and credit rating downgrades.

S&P Global affirmed its credit ratings on First Abu Dhabi Bank, Abu Dhabi Commercial Bank, Mashreq Bank, Sharjah Islamic Bank and National Bank of Fujairah and revised the banks’ outlook to negative due to the worsening operating environment which is expected to result in significant deterioration of the banks’ asset quality indicators and hamper their profitability.

The rating agency expects loan quality to be tested and the cost of risk to increase, weighing on banks’profitability in the next 12 to 24 months.

The average ratio of stage 3 loans to total loans for the top 15 banks was 6.3 per cent in 2019 compared to 5.8 per cent the previous year, said S&P.

According to S&P Global, “The sharp drop in oil prices and reduced activity due to COVID-19 will exert significant pressure on the economy, especially the real estate, trade, retail, transportation, and hospitality sectors.”

The banks’ profitability is also expected to drop following interest rates cuts by the Central Bank of the UAE (CBUAE) after an emergency move by the Fed to slash its benchmark interest rate by a full percentage point to near zero in response to the impact of the coronavirus outbreak.

S&P said that reliance on deposits from government-related entities could also create risks given some of these entities might use these funds over the next 12-24 months. However, the rating agency does not foresee any material impact on the banking system’s funding and liquidity profile.

The recovery of oil prices from $30 in 2020 to $50 in 2021 as well as a slight improvement in the non-oil sector in 2021 is expected to lessen the impact on banks’ asset quality indicators.

Moreover, CBUAE’s recently launched Targeted Economic Support Scheme is also projected to ease commercial enterprises’ financial positions.

S&P Global previously projected that GCC banks should maintain stable financial profiles in 2020 without any major increase in geopolitical risk or a sharp fall in oil prices.


RELATED STORIES: COVID-19 Low oil prices Central Bank of the UAE S&P Global

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