Low crude prices and pandemic to hurt Gulf banks’ profits; capital is sound, says Moody’s

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Banks in the Gulf Cooperation Council (GCC) region will see their profits fall this year as economies shrink amid the coronavirus outbreak and lower oil prices, but have adequate capital underpinning their solvency, Moody’s Investors Service said in a report Monday.

“The economies of all six GCC countries will contract, sapping the banks’ two main income streams – interest on loans, and fees and commissions – while provisioning charges for loan losses will rise sharply,” said Nitish Bhojnagarwala, Vice President-Senior Credit Officer at Moody’s.

“The banks’ capital will remain adequate, however, underpinning their solvency.”

Moody’s expects real non-hydrocarbon GDP in the GCC (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) to contract between 3.5% and 5% in 2020.

This will erode loan demand and banks’ appetite to lend, resulting in an average loan contraction between 0% and 5%, the rating agency said.

Simultaneously, interest rate cuts and rising customer defaults will reduce banks’ interest income, while funding costs will increase moderately.

“Economic recession will weigh on the creditworthiness of both corporate and household borrowers,” said Bhojnagarwala.

“The banks will feel the effects through rising nonperforming loans, requiring higher provisioning charges, which are expected to increase significantly from $11.7 bln recorded for Moody’s rated banks for 2019,” added the Dubai-based analyst.

GCC banks rated by Moody’s delivered aggregate net income of around $34.7 bln in 2019, providing a cushion to absorb losses, the rating agency said.

Higher provisions and lower income will result in an average decline in full-year net profit of more than 20%. Good provisioning coverage for systems such as Kuwait, Qatar and Saudi Arabia will provide an additional cushion.

Consequently, capital may dip slightly but will remain sufficient amid a lower asset base and low dividend payouts.