In previous articles, we touched on the expected financial performance of Gulf banks in light of the Corona pandemic, and we have mentioned that despite the good financial conditions these banks enjoy, the decline in their profits during this year is a highly anticipated issue, due to the decline in their business on the one hand, and their forced to increase provisions. On the other hand. What made us return to this issue is the issuance of some international reports that monitor the performance of Gulf banks during the first half of 2020.
KPMG recently issued a report on the performance of listed Gulf banks for the first half of the year, which showed that their profits decreased by 34.7% to $ 12.3 billion during the first half of 2020, compared to $ 18.8 billion during the same period last year. Expected credit losses also increased by 76.8% during the first half of this year to reach $ 9.4 billion. These indicators, from our viewpoint, are natural, as banks have focused on building larger allocations in anticipation of the coming repercussions of the pandemic, and have also worked to improve costs and increase productivity in order to compensate for the decline in revenues.
The report also shows the total support measures provided by the Gulf governments and central banks to protect the economy, society, individuals and banks from the repercussions of the Corona pandemic, and Bahrain topped in terms of the volume of support provided, looking at the GDP by 30%, followed by the Sultanate of Oman by 28%, then the UAE by 17%. The regulatory measures supporting the banks included delaying installments, supporting liquidity, lowering interest rates, easing regulatory requirements and other measures.
On the other hand, credit rating agency Standard & Poor’s expects that Gulf banks will face continuous challenges until 2021 due to the long expected economic recovery. The agency built its forecast that the Corona pandemic vaccine will be widely available by mid-2021, and that the price of a barrel of oil will stabilize at an average of $ 50. And it expected the economies of the Gulf countries to grow by an average of 2.4% in 2021, compared to a contraction of 5.6% this year. At a time when the agency expects that lending growth will remain weak in the Gulf countries, with the exception of Saudi Arabia, where mortgage loans have expanded rapidly due to a government initiative to increase home ownership in the country, and it is likely that the cost of risks will continue to increase with the acceleration of the detection of doubtful assets, indicating that interest returns will remain Below their historical levels, due to the US Fed’s policy of cutting interest rates for a longer period.
It also expects that the profitability of Gulf banks will continue to decline, with minimal losses reported due to exposure to high-risk asset classes such as small and medium-sized companies and credit cards, or in few cases at worst due to lack of provisions. This will lead Gulf bank managements to look more carefully at costs, try to take advantage of fintech opportunities and reduce the number of branches.
However, the portfolio structure and strong capitalization of GCC banks provide support to creditworthiness. In addition, basic and stable deposits still dominate the finance sector with a limited contribution from external financing. However, the capital of Gulf banks is strong in both quantitative and qualitative terms, and it protects them from shocks, as the agency indicates that 65% of its expectations for the ratings of Gulf banks are stable.
As for Moody’s, it expected that the new Corona crisis and the drop in oil prices would accelerate the pace of mergers and acquisitions of banks in the Gulf Cooperation Council countries, in their endeavor to reduce costs, as banks are facing pressure to make greater cost adjustments, with lower oil prices, and banks seek to face pressure Decline in revenue.
Therefore, operating efficiency is the key to maintaining profitability.
According to the agency, there is a surplus in the number of Gulf banks relative to the population, as the number of banks exceeds about 160 banks that provide services to about 58 million citizens and residents, and the UAE came in the lead with about 48 banks, then Saudi Arabia and Bahrain with the same number of banks, about 31, and Kuwait 22 banks And Oman has 18 banks.
Just as Gulf banks make most of their lending operations outside the dominant oil sector, growth in non-oil sectors tends to be positively correlated with oil prices, because revenues from oil and gas production directly feed regional governments, and they are the backbone of government spending that drives the rest of the economy.
During the past years, particularly since 2014, the countries of the region have witnessed a large wave of mergers due to the drop in oil prices, and it is expected that we will witness a new wave of these mergers with the aim of establishing larger and more flexible financial institutions that respond more to the requirements of digital transformation, investing in technology and meeting regulatory requirements. And the effective contribution to the stage of recovery and then to the stage of sustainable growth of the Gulf economies.
Former President of the Union of Arab Banks
President of the Bahrain Association of Banks
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