The banks in the Gulf Cooperation Council (GCC) region are projected to maintain adequate liquidity in 2021-22 despite the pandemic driven economic crisis and that capital buffers are sufficient to cover the likely decline in asset quality, as per the report from Fitch, an international credit rating agency.
“We expect liquidity for GCC banks to remain adequate in 2021-22 despite the economic shock from the pandemic. The pandemic has not led to deposit withdrawals by governments or government-related entities, in contrast to the oil price shock of 2014-15,” Fitch said in a report.
Last year, the banking sector liquidity was highly supported with the governments’ interest towards sovereign debt issuance and the increased household savings due to limited spending opportunities during lockdowns.
During the pandemic, the GCC banking sector liquidity has continued to be adequate due to several support measures and the money supply also increased in the region driven by sovereign debt issuance, growth in household savings and the absence of significant government deposit withdrawals.
“We do not expect significant government deposit withdrawals in 2021-22 as the authorities’ fiscal deficit funding strategies prioritize debt issuance over asset drawdowns,” Fitch said.
Estimating that the GCC banks’ capital buffers are sufficient to absorb the possible decline in asset quality following the end of loan moratoriums in 2021, the report stated that the average CET1 ratio was 15.2 percent at the end of 2019 and “we expect a slight deterioration in this ratio to about 14.5 percent by end-2021, driven mainly by weaker profitability.” Fitch expects slow loan growth and lower dividend payout ratios to limit pressure on banks’ core capital ratios.
“Our view is supported by healthy total reserve coverage of Stage 3 loans and pre-impairment profitability buffers, which provide banks with an extra cushion against deteriorating credit conditions,” the rating agency said.
Fitch viewed that banks’ loan quality to be more vulnerable in the UAE than in Kuwait, Saudi Arabia and Qatar due to relatively high levels of Stage 3 loans and deferred exposures and related balances.
According to Fitch’s report, the Qatari banks have comparatively strong credit metrics owing to a high proportion of domestic government exposure and lower Stage 3 loan ratios in the pre-pandemic period.