Next year may prove more challenging for banks in the UAE, as their asset quality and profitability are forecast to weaken on the back of a continued slowdown in the economy and real estate sector.
Low oil prices, coupled with ongoing mitigating measures, such as the postponement of debt payments, could also result in more bad debts piling up, S&P said in its latest analysis.
S&P said the relaxation of certain prudential requirements could erode banks’ strong capital buffers, and that credit losses could spike up to 200 basis points (bps), especially given that some major companies are facing some serious issues.
One of the established organizations in the UAE, Arabtec, has recently announced shareholders’ decision to dissolve the company.
Extension of stimulus
The UAE Central Bank CBUAE recently said it will extend for another six months, starting from January, the duration of a 50 billion dirhams ($13.6 billion) “Zero Cost Facility” aimed at easing liquidity management for banks through collateralized funding at zero cost.
In March the CBUAE launched $70 billion worth of capital and liquidity measures as part of a Targeted Economic Support Scheme (TESS) aimed at providing economic stimulus during the coronavirus crisis.
The UAE has rolled out a series of stimulus packages and initiatives to mitigate the financial impact of the coronavirus pandemic, granting rent reprieves, deferring loan repayments, and opening up interest-free credit lines to businesses and individuals.
At least 310,000 customers have so far benefited from the UAE’s loan deferment initiative since the onset of the coronavirus pandemic.
S&P Global Ratings: Country by country banking outlook 2021
The pandemic and low oil prices will both weigh on Bahrain’s economy. We expect this to cause an accelerated decline in real estate prices and to weaken asset quality indicators and the profitability of retail banks. The deterioration would occur toward the end of 2020 and the beginning of 2021 and should remain broadly manageable.
Retail banks’ net external debt was still contained at 10.8% of system-wide domestic loans on June 30, 2020. We expect it to climb to around 15% in the next 12-24 months, as banks raise external funds. A large portion of the banking sector’s external funding is from the Gulf Cooperation Council (GCC). The $10 billion GCC financial support package will partly cover the government’s funding needs until 2023. We expect loan growth will remain below 5% in 2021-2022 as economic conditions gradually improve with real GDP expanding by 3.5%.
The banking sector’s substantial exposure to real estate and construction remains a concern, especially given the falling real estate prices. We expect non-performing loans (NPLs) to increase and the cost of risk to almost double in 2020 compared with 2019.
We expect real GDP to contract by 7% this year and project no growth in 2021 unless production cuts are eased which they have, by 500k barrels per month to April 2021.
We forecast that Kuwait’s central government deficit will widen to 30% of GDP in 2020 from an estimated 10% in 2019. We expect moderate loan growth of around 1%-3% in 2020-2022 as economic conditions gradually improve. Net interest margins will decline on the weaker interest rate coupled with tightening liquidity conditions. We also expect the cost of risk to increase, leading to an overall decline in profitability.
The Saudi banking system has largely demonstrated its resilience despite the low oil prices and weak economic growth.
Despite gradual build-up of external funding, the Saudi banking sector remains predominantly funded by customer deposits, which have been stable. Although we expect some further increase in external debt, the banking sector will remain a net external creditor.
Higher-than-expected lending growth of 10% in 2020 is predominantly driven by government stimulus for mortgages and small and midsize enterprise (SME) financing, accounting for over 75% of the increase.
As deferral programs are gradually phased out and the economy adjusts to the new normal, the cost of risk will remain elevated in 2021, increasing to 130 bps-140 bps (from 80 bps in 2019), before starting to gradually normalize in 2022.
We expect Saudi banks will be able to navigate these headwinds and maintain a return on average assets of about 1.2% in the coming years.
We expect asset quality and profitability to deteriorate in 2020-2021 as the economy experiences a sharp recession. We expect GDP to contract by approximately 8.5% in 2020 and recover only modestly next year. Lending growth will remain muted as regulators lift their forbearance measures.
Asset quality to deteriorate. The fall in oil prices and the economic slowdown will prompt a rise in problem loans and the cost of risk, at a time when the real estate sector was already under significant stress.
Because of ongoing regulatory forbearance measures, we anticipate that NPLs will reach a peak in 2021. The fraud case in one large corporate and the recent liquidation of a major construction company, combined with banks’ strategies to start building additional provisions, will push credit losses to 180 bps-200 bps in 2020-2021.