GCC Banking Sector

Covid-19 Impact on the GCC Banking Sector

The Covid-19 pandemic had an unprecedented impact on the global economy. At the on-set of March 2020, most economies in the GCC region were under lockdown. The sharp drop-in global oil prices left the GCC banks facing two economic challenges. Firstly, oil prices plummeted due to falling demand and consequent rise in supply stocks. The decreased demand was a repercussion caused by lockdown measures adopted by governments across the world. Production and manufacturing have been globally disrupted and investment plans are on indefinite hold.

The free fall of equity markets since February last year has widened the global risk resentment at a historic high; however, stimulus measures adopted by various central banks globally has resulted in the equity markets coming back to pre-pandemic levels.

Through this publication, we aim to shed light on upheaved trends portrayed by the GCC on credit loss provisions reported by banks in their FY 2020-21 financials, the upcoming challenges that the banks need to tackle, and a summary of significant regulatory support provided by each GCC country to reign in further economic losses.

The banking sector is now facing fresh operational and regulatory challenges emerging from governmental support measures meant to reduce the financial burden on the over-leveraged tax paying population.

  • Credit Risk:

    Credit provisioning by government for individuals & corporates has brought along a new risk perspective along with a thorough understanding of the severely affected sectors, particularly in the hospitality and real estate areas. Banks & FIs have to focus onrecalculations of these COVID grantedprovisions in line with thecurrent and predicted scenarios and assess thesubsequent progressive or regressive effect on the capital position.
  • Liquidity Risk:

    Analyse potential impacts on government deposits in relation to volatility in post-pandemic oil-prices as well as increased withdrawals from corporate and retail sectors.
  • Market Risk:

    Due to increased volatility in markets, there is a heightened possibility of ‘Flight to Quality’ phenomenon inducing bidask spread on certain securities.

During this period, GCC governments and central banks also announced various economic support measures including payment holidays for borrowers and targeted liquidity support for banks. Described below are economic support measures from the GCC governments and their respective Central banks to soften the negative economic impact and favour recovery.

  • Deferment of payments for loans in affected sectors for six months without any additional fees or penalties
  • New loans for affected sectors to be granted at a maximum rate of 1.5% with no repricing for the next 6 months
  • Provision of zero cost repo facilities to compensate the banks for funding affected sectors
  • Guarantees to banks for support to affected sectors under soft loan and waiver package
  • No fees and commissions on POS / ATM transactions

While there are wide-ranging views on how this situation will affect the financial markets, one point over which there is unanimous agreement is that we will be dealing with the domino effects of the COVID-19 pandemic for the foreseeable future, and the banking sector as a whole will most certainly evolve as a result of this. Those banks that are agile, flexible and willing to transform business models will be the ones that succeed, and secure their financial strength for future growth, while those that rest on their laurels will be left behind in an increasingly competitive sector.

At Auronova, we have analysed the current situation and brought across some specific insights the banking sector might consider and assess while taking the necessary measures to cope with this “new normal”. In October 2020, Auronova released an article showcasing the effect of the Covid-19 pandemic on GCC region. This document offers additional tools to navigate through turbulent waters in this uncertain environment.

Economic Support Measures

Results Snapshot

Impact on Banking Sector: Credit Risk

Impact on Banking Sector: Liquidity Risk

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