Fitch: GCC bank credit profiles to weaken despite unprecedented stimulus

Fitch Ratings-London-29 April 2020: The standalone credit profiles of Gulf Cooperation Council (GCC) banks are set to weaken due to the coronavirus pandemic and lower oil prices despite unprecedented economic stimulus packages worth hundreds of billions of US dollars, Fitch Ratings says in a new report. All six GCC governments were quick to announce stimulus packages for their banking sectors to mitigate the economic impact of the pandemic, but we expect banks' profitability and asset quality to deteriorate, leading to pressure on some banks' Viability Ratings.

GCC countries announced monetary, fiscal and macro-prudential stimulus measures dwarfing any previously seen in the region. These are equivalent to significant proportions of GDP and could be increased if the crisis deepens.

Interest rate cuts and financial aid, such as temporary loan repayment relief, should help the sectors hit hardest by the economic impact of the pandemic, particularly SMEs and the private sector. However, we expect the banks' asset quality to deteriorate as not all borrowers will be able to weather the impact of the sharp economic contraction unscathed. Besides the oil sector, several key non-oil sectors are vulnerable, including real estate and construction, hospitality, transport, trade and retail.

Most central banks in the region have relaxed capital and liquidity requirements, and scaled back other lending restrictions, to help banks to keep lending amid the pandemic. However, this is credit-negative and could lead to looser underwriting standards, higher risk appetite and, over time, weaker asset quality.