Doha: Supported by their solid asset quality, strong capitalisation levels and liquidity buffers, the GCC banks are capable of weathering the current storm triggered by the pandemic and the slump in oil prices, Raja Ghoussoub, senior economist at NBK noted yesterday.
Generally, asset quality deterioration is the prime reason for bank failures globally. GCC banks exhibit solid asset quality metrics compared with their global peers, the NBK economist said in his latest research note.
In the GCC, non-performing loan (NPL) ratios of 2 percent to 3 percent (and even lower) are common while 4 percent to 5 percent ratios are considered relatively “high”. In contrast, NPL ratios globally tend to be higher across the credit cycle.
The discrepancy in terms of NPL coverage ratios i.e. provisions divided by NPLs is much starker with GCC ratios usually in excess of 100 percent while they tend to be significantly lower globally.
On top of their generally good asset quality indicators, GCC banks exhibit very solid capital adequacy ratios that are way higher than the minimum requirements of Basel 3. In fact, the regulators in the GCC have imposed higher minimum requirements than those prescribed by Basel 3, in addition to extra buffers such as the countercyclical buffer and the domestic systemically important banks (D-SIB) buffer.
In the wake of the coronavirus pandemic, some central banks in the region have relaxed, fully or partially, some of the required buffers such as the capital conservation buffer and the D-SIB, which have widened the banks’ lending capacity.
NBK noted that credit growth in this environment is not expected to be strong, putting less pressure on capital consumption. “Overall, we think the GCC banking sectors as a whole are in a comfortable position when it comes to capital adequacy, although on an individual bank level, some of them may need to boost their capital bases especially if the current weak environment drags on”, Ghoussoub said.
However, higher loan provisioning and lower NIMs will pressure banks’ profitability in 2020. Furthermore, if liquidity tightens then cost of funding will increase, which will put further stress on NIMs and hurt profitability even more. The latter is also expected to suffer from muted fee income on the back of weak projected credit growth.
