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GCC banks face earnings shock from low oil, real estate pricing

DUBAI, April 6, 2020

The GCC conventional and Islamic banks will see significantly reduced revenue and credit growth in 2020 mainly due to the sharp decline in oil prices, accelerated real-estate price corrections in some markets and drop in vital nonoil economic sectors, said a report.
 
The sharp drop in oil prices and measures implemented by regional governments to contain transmission of the coronavirus (Covid-19) will take a toll on important sectors such as real estate, hospitality, and consumer-related, stated S&P Global Ratings in its report.
 
The report acknowledges a high degree of uncertainty about the rate of spread and peak
of the Covid-19 outbreak. 
 
"Some government authorities estimate the pandemic will peak about mid-year, and we are using this assumption in assessing the economic and credit implications. As the situation evolves, we will update our assumptions and estimates accordingly," stated the advisory firm in its report.
 
The sharp decline in oil prices, accelerated real-estate price corrections in some markets, and drop in vital nonoil economic sectors will pressure banks' earnings, it added. 
 
According to S&P Global Ratings, Islamic banks are likely to see a greater effect on asset-quality indicators since they typically have a higher proportion of exposure to real estate and cannot charge late payment fees.
 
The report said the stimulus and support measures from GCC governments will help banks navigate the challenging environment but likely not resolve structural problems unless we see stronger intervention.
 
Under our base-case scenario, we assume that these measures will be relatively short lived and forecast a gradual recovery in nonoil activity from third-quarter 2020.
 
However, the severe shock could cause irreparable damage to some parts of the nonoil economy, warned S&P Global Ratings.
 
Furthermore, if the recovery takes longer than we expect, GCC banks could feel greater pressure. Although growth rates last year were almost the same as 2018, GCC conventional banks saw faster increases than Islamic banks. 
 
This was mainly explained by acquisitions. Emirates NBD, for example, acquired DenizBank in Turkey, increasing its total assets by almost one-quarter.
 
Other transactions were mainly local or regional with Abu Dhabi Commercial Bank absorbing two other
local banks (including one Islamic) and Saudi British Bank taking over another local bank. 
 
In 2020, we expect slower organic and nonorganic growth, with Islamic and conventional banks seeing similar rates of 2%-3%.



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