The risk to Gulf Cooperation Council (GCC) banks’ asset quality following the economic shock due to the coronavirus pandemic and low oil prices is masked by extended support measures for borrowers, Fitch Ratings says in a new report.
Prolonged support measures will limit short-term pressure on asset quality, delaying the recognition of Stage 3 loans well into 2021. Stage 3 loans ratios rose slightly in 1H20, largely due to cash flow pressure on certain corporates that did not benefit from payment holidays or whose financial health was already weak.
However, asset-quality metrics could weaken much more materially in 2021-2022 once support measures are withdrawn, particularly if economic activity does not recover strongly.
Several GCC countries have prolonged their loan deferral schemes well into 2021. We believe this reflects the authorities’ expectations that pressure on households and corporates could persist even as the economy recovers. Rising unemployment is a major economic risk, as evidenced by employment surveys and unemployment rates already increasing, particularly in Saudi Arabia.
We expect liquidity for GCC banks to remain adequate in 2021-2022. The pandemic has not led to deposit withdrawals by governments or government-related entities, with governments instead favouring sovereign debt issuance. Household savings, which have grown due to limited spending opportunities during lockdowns, also support liquidity.
We believe GCC banks’ capital buffers are sufficient to absorb the likely deterioration in asset quality following the end of loan moratoriums in 2021. Reserve coverage of Stage 3 loans is healthy and pre-impairment profitability buffers provide an extra cushion against deteriorating credit conditions.
