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Gulf Banks’ strong earning capacity gives them room for maneuver- S&P Global Ratings

The strong earning capacity of banks in the Gulf Cooperation Council (GCC) countries will help them navigate the shock related to COVID-19 and the oil price dive, and protect their hybrid capital instruments

Rated GCC banks could absorb up to a $36 billion shock before starting to deplete their capital base Do not foresee that banks will systematically skip the payment of coupons on their hybrid instruments The measures adopted to contain COVID-19 have pushed the global economy into recession

The strong earning capacity of banks in the Gulf Cooperation Council (GCC) countries will help them navigate the shock related to COVID-19 and the oil price dive, and protect their hybrid capital instruments, S&P Global Ratings said in two reports published today on RatingsDirect, “How Resistant Are Gulf Banks To The COVID-19 Pandemic And Oil Price Shock?” and “Will COVID-19 And Cheap Oil Reset The Market For GCC Tier 1 Instruments?”

“Most rated GCC banks have relatively strong profitability and a conservative approach to calculating and setting aside loan-loss provisions,” said S&P Global Ratings credit analyst Mohamed Damak.

“Overall, we estimate that rated GCC banks could absorb up to a $36 billion shock before starting to deplete their capital base. This corresponds to about 3x our calculated normalized losses, which implies a substantial level of stress in our view,” Mr. Damak added.

“As we see the COVID-19 pandemic and the drop in oil price as a profitability event rather than a capital event, we do not foresee that banks will systematically skip the payment of coupons on their hybrid instruments or write down the principal amount,” stressed Mr. Damak.

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Over the past five years, banks in the GCC have raised about $12.2 billion of capital using listed hybrid instruments, and an additional about $8 billion were raised using over-the-counter hybrid instruments. These instruments are generally perpetual and callable after five years or every following year at the issuer’s option. Moreover, issuers typically have the capacity to defer coupon payment with investors having no recourse in such circumstances Some issuers already proactively refinanced some instruments approaching their first call date in 2020, benefiting from the then-supportive market conditions.

“We therefore expect such issuers to call the instruments unless the regulator prevents them from doing so or the banks’ decide to extend call dates. For others, the decision to call or not to call their instruments in 2020 will be purely motivated by such a move’s economic impact on the bank,” concluded Mr. Damak.

Read: Investment banks face added risk in the Middle East following COVID-19 pandemic

S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

This report does not constitute a rating action.