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GCC bank asset-quality risk masked by extended borrower support

February 10, 2021

UAE banks' loan quality is more vulnerable, says Fitch

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 said in a new report.

Prolonged support measures will limit short-term pressure on asset quality, delaying the recognition of Stage 3 loans, or impaired loans, well into 2021. Stage 3 loans ratios rose slightly in H1 2020, 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 However, asset-quality metrics could weaken much more materially in 2021-2022 once support measures are withdrawn, particularly if economic activity does not recover strongly, the ratings agency said.

Several GCC countries have prolonged their loan deferral schemes and other support measures into 2021 to alleviate cash flow pressure on households and corporates. Oman and Saudi Arabia have extended their schemes to end-March 2021, Qatar to mid-June 2021, and Bahrain and the UAE to end-June 2021. Kuwait is accordingly the only GCC country where payment holidays have not been extended beyond September 2020.

“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.”

Loan quality

Fitch believed banks’ loan quality to be more vulnerable in the UAE than in Kuwait, Saudi Arabia and Qatar due to relatively high levels of Stage 3 loans and deferred exposures and related balances.

Fitch expects 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.

However, banks’ frontloaded provisions should limit additional impairment charges, the agency said. “We expect GCC banks’ average cost of risk to decline to 1.2 percent in 2021 from more than 1.5 percent in 2020.”

Nevertheless, it will still be high by historical standards as the economic fallout from the pandemic continues, it added.

GCC banks' capital buffers are sufficient to absorb the likely deterioration in asset quality following the end of loan moratoriums in 2021, Fitch said. Reserve coverage of Stage 3 loans is healthy and pre-impairment profitability buffers provide an extra cushion against deteriorating credit conditions.

Banks in Saudi Arabia and Kuwait have the most resilient core capital positions given their ample loan-loss allowances (especially in Kuwait), high CET1 ratios and low proportion of loans under payment holidays.