Here below are sourced financial reports analyzing Saudi, UAE, and GCC banking’s performances in 2020 and what’s expected for 2021.
The financial performance of rated Saudi banks will remain under pressure in 2021, on the back of lower interest rates and higher cost of risk, S&P Global Ratings said in a new report.
As regulatory forbearance measures are gradually phased out and the economy adjusts to the new normal, the cost of risk will remain elevated in 2021, increasing to 140 bps (from 80 bps in 2019), before starting to gradually normalize in 2022, the rating agency said in the report, “Banks in Emerging Markets: 15 Countries, Three Main Risks.”
S&P analysts expect that banking systems in emerging markets including Saudi will face three common risks in 2021:
1- The expected deterioration in asset quality indicators as regulatory forbearance measures are lifted
2- A volatile geopolitical environment or domestic policy uncertainty
3- Vulnerability to abrupt movements in capital flows for a fewl
On the geopolitical side, with the new US administration pushing for the potential reinstatement of the Iran nuclear deal, it remains unclear how Saudi will tackle the related challenges.
S&P Global Ratings expect GDP growth to recover in the United Arab Emirates (UAE) this year from the sharp recession of 2020 triggered by the COVID-19 pandemic and low oil prices.
However, S&P Global Ratings think the 2020 shock will continue to reverberate through the economy and banking sector. S&P expects real GDP (in dollar terms) will only return to the 2019 level by 2023.
Key sectors, particularly real estate, hospitality, and retail, will likely remain under pressure for the next 12 months.
The country’s target to vaccinate 50% of the population by the end of Q1 2021 is positive, but further virus waves and mutations pose significant downside risks.
S&P expects banks’ asset quality to deteriorate and the cost of risk to increase further as they start recognizing the impact of the 2020 shock and as the Central Bank of UAE (CBUAE) lifts its forbearance measures progressively in H2 2021.
Given continued low-interest rates, banks’ profitability will, therefore, remain low in 2021 with a few banks potentially showing losses.
Strong and stable capital buffers, good funding profiles, and expected government support should continue to support banks’ creditworthiness in 2021.
Three leading banks in the UAE reported a fall in profit last year due to economic fallout from the COVID-19 pandemic and lower oil prices.
Emirates NBD, Dubai’s biggest lender, reported a 52% plunge in its net profit at $1.9 billion, compared to a $3.9 bn profit in the previous year.
Likewise, First Abu Dhabi Bank (FAB), the biggest bank in the UAE, reported a 16% fall in net profit for 2020, hit by higher impairment charges.
FAB Group‘s net profit stood lower at $2.9 bn for 2020, compared to $3.4 bn in the previous year.
Similarly, Emirates Islamic reported a net loss of $131.23 million, lower by 145% year-on-year.
2021 started positively with the resolution of the boycott of Qatar by four Arab countries, the rating agency noted.
“In our view, this will improve political and economic cooperation across the GCC. That said, we believe the damage done by the three-year boycott of Qatar to the GCC’s political cohesiveness, both real and perceived, is likely to remain. If geopolitical risks heightened, investors could shift their attention to more stable regions. This would prompt an increase in funding costs, a lower appetite for regional instruments, or major foreign funding outflows,” S&P said in the report.
Rated banks in the GCC face an uphill struggle in the next 18 months due to the protracted nature of the economic recovery and the expected gradual withdrawal of regulatory forbearance measures.
S&P Global Ratings’ base case is that a COVID-19 vaccine will be widely available by around mid-2021 and that the oil price will stabilize at an average of $50 per barrel.
GCC economies will expand by an average of 2.4% in 2021, compared with a contraction of 5.6% in 2020.
“However, we expect that lending growth will remain muted, with the exception of Saudi, where mortgages have been expanding rapidly on the back of a government initiative to increase homeownership in the country,” S&P said.
GCC banks’ lending growth slowed in the first half of 2020 to an annualized rate of 6.6%, compared with 9.4% in 2019. Banks have reduced their risk appetite and corporates have reduced their capital expenditure and focused on cash preservation.
The cost of risk will continue increasing and GCC banks’ profitability will continue declining.
At this time, 65% of outlooks on GCC bank ratings are stable and 30% are negative.