(MENAFN- Gulf Times) Qatar's large state footprint in the economy helped local banks navigate (pandemic-induced) stress with a minimal impact, with further positive momentum expected from the 2022 World Cup, S & P Global Ratings has said in a report.
S & P Global Ratings believes banks in the Gulf Co-operation Council (GCC) have demonstrated resilience to the Covid-19-related economic shock and last year's sharp decline in oil prices.
Western and local central banks' unprecedented interventions, which took the form of liquidity injections and regulatory forbearance measures, helped cushion regional banks from wider uncertainty and masked the true hit to their asset quality indicators.
However, a gradual recovery in private sector economic activity, supportive public sector demand for credit, and higher oil prices (S & P Global Ratings assumes an average of $75 per barrel in 2021 and $65/b in 2022) have also helped amortise the impact on banks. In turn, nonperforming loan (NPL) ratios increased only 20 basis points (bps) for the top GCC 45 banks between year-end 2020 and June 30 this year.“We expect the NPL ratio to rise in the next 12-24 months without exceeding 5%-6%, compared with 3.8% at June 30, 2021, as forbearance measures are gradually withdrawn and the pandemic's impacts on weaker businesses are laid bare.
“However, we also expect the GCC economies to expand at an unweighted average of 1.8% in 2021 and 4% in 2022, in part facilitated by increased credit growth. These factors underpin our expectations for average regional cost of risk to decline in 2021 and start to normalise from 2022.”
After an improvement in first-half 2021, S & P expects GCC banks' profitability to stabilise in 2021-2022.
Lower cost of risk and good efficiency – with an average cost to income of 38% in first-half of 2021 – will likely compensate for a lower but stable margin of 2.4% over the same period.
Return on assets will therefore also stabilise at 1.0%-1.2%, below historical levels but higher than the 0.8% for the top 45 banks in the region last year.
In S & P view, banks will continue to leverage fintech opportunities, move staff to cheaper locations, and cut physical branches to reduce costs.
Today, 82% of S & P outlooks on GCC bank ratings are stable, mirroring banks' resilience to the Covid-19 shock and an improving macroeconomic forecast.
Downside risks include a lower oil price than it expects, an escalation of geopolitical risks, and new pandemic concerns such as the emergence of more contagious or vaccine-resistant variants.
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