Dual Shock: COVID-19, low oil price to hit GCC banks' profitability - Moody's | ZAWYA MENA Edition

Dual Shock: COVID-19, low oil price to hit GCC banks' profitability - Moody's | ZAWYA MENA Edition:

The dual shock from the coronavirus pandemic (COVID-19) and the collapse in oil prices will severely dent profits at banks in the Gulf Cooperation Council (GCC) countries this year. Economic contraction across all six GCC nations will depress credit growth and sap the banks' two main income streams; interest on loans, and fees and commissions, Moody's said in a note.

Provisioning charges for potential loan losses are expected to rise sharply. The Gulf banks' capital will remain adequate, however, underpinning their solvency. Narrower margins and contraction in lending will pressure revenue, the global ratings agency reported.

"We expect real non-hydrocarbon GDP in the GCC to contract between 3.5 percent and 5 percent in 2020. This will erode loan demand and banks' appetite to lend, resulting in an average loan contraction between 0 percent and 5 percent. Simultaneously, interest rate cuts and rising customer defaults will reduce banks' interest income, while funding costs will increase moderately," said Moody’s.

"Combined, these factors will narrow net interest margins. Increased government debt issuance (both bonds and sukuks) particularly in Saudi Arabia, Bahrain and Oman will help to offset the margin pressure as banks increase their exposure to these higher yielding instruments," the ratings agency said.