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.

We believe that profitability will be the first credit metric to visibly weaken. Asset quality deterioration will be masked, at least initially, by loan deferral programmes and flexibility in how banks classify troubled loans. We expect regulators to allow significant flexibility in impairment recognition under IFRS 9 to avoid excessive pro-cyclical effects during what could be a relatively short-term shock.

If economic disruption from the pandemic and lower oil prices continues into the medium term, deteriorating asset quality will become more visible and banks' capital buffers will start to shrink. Liquidity could also come under pressure if GCC sovereigns and government-related entities withdraw deposits from the banking system to support themselves, although we do not expect this in the near term.

We expect some banks' Viability Ratings to come under pressure. However, about 70% of GCC banks' Long-term Issuer Default Ratings (LT IDRs) are driven by sovereign support and would only be downgraded in the event of a sovereign downgrade. The LT IDRs that are driven by Viability Ratings are predominantly in Saudi Arabia, Bahrain and Oman.

The report "GCC Banks to Weaken Despite Hundreds of Billions of Dollars of Stimulus" is available at www.fitchratings.com or by clicking the link above.

Copyright Press Releases 2020