Complex Made Simple

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

Oliver Wyman and Morgan Stanley have released a report highlighting that in the event of a rapid economic rebound following the COVID-19 pandemic, the impact on wholesale and investment banks’ earnings are even more at risk in GCC countries.

New report by Oliver Wyman and Morgan Stanley explores current trends, analysis and risk facing wholesale and investment banking Impact of COVID-19 on wholesale banking more profound in the Gulf Cooperation Council (GCC) countries due to low oil price Investment banks at risk of significant profit decline in the post-COVID-19 environment

Leading management consultancy Oliver Wyman and investment bank Morgan Stanley have released its latest report highlighting that in the event of a rapid economic rebound following the COVID-19 pandemic, the impact on wholesale and investment banks’ earnings are even more at risk in GCC countries.

Entitled ‘Steering through the next cycle’, the new report outlines three potential scenarios for the evolution of the COVID-19 pandemic and its economic impacts on investment banks, ranging from a rapid rebound to a deep global recession, assessing the implications for wholesale banks over the medium-term.

Despite the banking industry having built extensive capital and liquidity buffers to endure a challenging downturn, their profitability heading into a crisis is at its lowest point, creating greater pressure on earnings that could reveal structural weaknesses in some banks’ business models. It is expected some banks will deliver returns of less than five per cent, far below the 10 per cent targeted by investors.

Read: Markets pay scant heed to IMF’s dramatic downgrade

In the most optimistic ‘rapid rebound’ scenario following the COVID-19 pandemic, which would take at least six months for normal operating conditions to be restored, Oliver Wyman and Morgan Stanley project that wholesale and investment banks could witness a 100 per cent erosion in earnings.

In the most pessimistic ‘deep global recession’ scenario, lasting at least one year, the combination of lower revenues and elevated credit losses for banks could drive earnings down by 277 per cent with credit losses of $200-300 billion.

Matthieu Vasseux, Head of Financial Services MEA at Oliver Wyman, said: “Our report shows that wholesale and investment banks are not immune to the COVID-19 pandemic. The impact of the pandemic on wholesale banking in the GCC is compounded by the 60 per cent collapse in the oil price, which could amplify GDP contraction by up to 40 per cent in the most challenging quarters, making the impact even more acute for the Middle East region.

“Although GCC countries are resilient, in the event of our worst case scenario, corporate defaults would increase alongside cost of risk by up to 200 per cent. Additionally, wholesale banking in the GCC is heavily geared towards wholesale lending, constituting 70 per cent of their total revenues, adding pressure to the top line which would also be affected by lower rates.”

Oliver Wyman believes the global economic impact of the COVID-19 outbreak depends on its duration, how far it spreads and the extent quarantine disrupts the labour market.

Read: The Business Impact of COVID-19 on the GCC Region: Implications and Opportunities for Growth