Are GCC banks ready to absorb further loan-loss shocks?

Are GCC banks ready to absorb further loan-loss shocks?

Rated GCC banks, which had set aside $10.9 billion of new loan-loss provisions in 2020 in the backdrop of the pandemic and low oil prices, have the capacity to absorb a further shock of up to $45 billion.

S&P Global Ratings estimates that rated banks in the GCC can absorb a shock of $31 billion-$45 billion in aggregate with a limited automatic effect on the assessment of capitalisation.

“This rises to $114 billion when banks hit the boundaries for a potentially weaker assessment of capital and earnings under our criteria and corresponds to a 3.1 per cent-11.3 per cent increase in their NPLs,” said S&P Global Ratings credit analyst Mohamed Damak.

The ratings agency expects banks' asset-quality indicators will continue to deteriorate and cost of risk to remain high as they start recognizing the true impact of 2020 and forbearance measures are lifted in second-half 2021.

According to S&P, the largest absolute capacity to absorb losses lies with Saudi banks, which dominate the pack due to their size. When compared with total lending, Kuwait's banks stand out given their significant provisions accumulated over the years.

“At year-end 2020, the total lending of banks