Credit risk concerns for future Gulf Banks.Deteriorating asset quality can hinder the role of banks in credit provision
The International Monetary Fund states that some countries have increased their holdings of government bonds in Gulf Bank’s total assets by 2020. Al-Rai learned that it ranges from 5-14% in Bahrain, Kuwait, Oman, Saudi Arabia and the United Arab Emirates, and averages over 20% in Qatar between 2009 and 2015.
A recent report entitled “Evaluating the Weaknesses of the Gulf Cooperation Council Countries’ Banking Sectors in the Aftermath of Covid-19” said that at the end of 2020, banks’ claims to the government increased from 6% to 8.5%. Said. 10% of total assets of banks in Oman and United Arab Emirates (5-year average), 12% and 15% to about 17% in Saudi Arabia and Bahrain, respectively.
However, it decreased from 5% to 2% in Kuwait and from 20% to 17% in Qatar. In addition, banks’ share of government debt in total government debt will rise from an average of 50% in 2014/2019 to 2020, as Gulf countries have taken advantage of lower rates of return to become more dependent on external funds. It decreased to 30%. Search for investor returns.
The report noted that the Gulf Bank is the dominant owner of government securities and that government deposits continue to be the main source of bank lending in some of these countries. Meanwhile, the report shows that banks’ exposure to state-owned enterprises (SOEs) has been relatively stable since 2014, albeit uneven across the region. Banks claim to state-owned enterprises account for 2-4 percent of total credit in Kuwait and Saudi Arabia, 11-13 percent in Oman and the United Arab Emirates, and 20 percent in Qatar.
Despite increasing government exposure, the Gulf Bank continues to play an important role in supporting the flow of credit to the economy during the pandemic. Banks’ ownership of government securities to credit granted to the private sector declined in Kuwait and Qatar, but remained stable in Bahrain, Oman and Saudi Arabia, with a slight increase in the UAE.
The International Monetary Fund has addressed the impact of the pandemic on the corporate sector, saying that even before the corona pandemic spread, non-financial firms in the Gulf region tended to become weaker until the Covid-19 crisis. I did. And it exacerbated these weaknesses. This includes (1) loan guarantees and employment insurance, (2) loan deferral, (3) corporate concessional credit lines, and (4) potentially concentrated banks and businesses through government-sponsored loans. Includes connections.
The report added that a company’s performance as measured by profitability, leverage, and debt repayment deteriorated over time. Return on equity in the region has been declining for the past 15 years, but this decline is more rapid in the Gulf countries than in emerging market economies.
On average, return on equity fell from 15% in 2005 to 4% in 2020, according to data. Despite a significant drop in leverage following the global financial crisis, corporate debt remained lower than in emerging markets, but continued to increase. Markets excluding Kuwait and Oman. Leverage increases were widespread across the sector.
The increase in leverage is reflected in the increase in debt costs measured by the interest coverage ratio, which has shrunk sharply since 2007. This can reduce the quality of the bank’s assets and create contingent liabilities if the measures are withdrawn.
According to data from the International Monetary Fund, Kuwait’s corporate sector’s return on equity was the only one to record negative growth in 2020 compared to other Gulf countries, but as before, all non-Gulf countries. Return on equity has declined at financial companies. As mentioned, Kuwait will have the lowest annual revenue growth rate of any Gulf country in 2020, as recorded.
Meanwhile, the Gulf region faced significant economic losses as a result of two double shocks resulting from a pandemic and falling oil prices in 2020, according to the report. Oil prices and production cuts under the OPEC Plus Agreement have affected the oil sector.
It is estimated that total GDP in 2020 will decrease by 4.8%, hydrocarbon GDP will decrease by 5.9%, and real non-hydrocarbon GDP will decrease by 3.9%, but some sectors such as construction and hospitality will be transported and wholesale. , The retail industry was the most affected.
The Gulf Bank has entered the COVID-19 crisis with abundant capital and liquidity, but continued support for government policies to combat COVID-19 could mask financial vulnerabilities. I have.
The report noted that financial and financial measures were taken to ease the burden on families, businesses and banks. With signs of recovery, policy support measures are increasingly targeting the affected sectors, especially SMEs.
Despite the large capital and liquidity crisis of the banking system, banks have had long-term health crises and their impact on economic activity, and financial management difficulties, especially in the most affected sectors. I faced a difficult operating environment due to the operating environment. , Low profitability, and increased provisions.
In addition, credit risk remains a concern given the uncertainty about the strength of recovery.
The International Monetary Fund believes that banks’ role in providing credit to support economic recovery and diversification can be hampered by poor asset quality.
Meanwhile, the report showed that the double shock strengthened the ties between government, banks and the real economy.
Policy support measures have helped mitigate the negative effects of the crisis on the economy, but through increased exposure to sovereign debt, increased potential contingent debt, and increased credit, the sovereign economy, banks, the real economy and the potential. Strengthened the relationship with the vulnerability. concentration.
Prior to these shocks, the Gulf countries experienced 20 years of significant fiscal deepening and increased inter-sectoral ties.
During this period, bank credit and capital inflows funded the expansion of the non-oil sector and helped the government smooth the business cycle in the event of falling oil prices.
However, deepening public finances is also accompanied by increased interdependence, which can turn into a series of vulnerabilities in times of crisis and promote cross-sectoral transmission.
Among these, the balance sheet link between the government sector, the banking system and the real economy acts as a mechanism for the transmission and amplification of real and nominal shocks.
https://www.timeskuwait.com/news/credit-risks-source-of-concern-for-gulf-banks-in-future/ Concerns about future Gulf Bank credit risk