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

Kingdom of Bahrain

  • Govt. of Bahrain announced a Bahraini Dinar 4.3bn stimulus package
  • Central Bank of Bahrain (CBB) requested the banks to offer deferment for 6 months on 23 March 2020 and later extended the option for another 6 months starting from January 2021
  • In December 2020, CBB also extended the Stage 2 Days Past Due criteria to 74 days (excluding deferrals) and reduced the cooling off period for restructured facilities to 3 months
  • CBB’s loan facilities will be increased to $9.8bn to allow debt instalments to be deferred and extra credit to be extended. CBB will provide concessionary repo arrangement up to 6 months at zero percent on case-by-case basis
  • Other measures include
    • 1. Doubling the Liquidity Support Fund to US$530m
    • 2. Exempting all tourism-related industry from tourism levies for three months
    • 3. Exempting all businesses from industrial land rental fees for three months

Kingdom of Saudi Arabia

  • In March 2020, Saudi Arabian Monetary Authority (SAMA) announced the introduction of Private Sector Financing Support Program with a total value of about Saudi Riyal (SAR) 50bn
  • In March 2020, SAMA deposited an amount of about SAR 30 billion for banks and financing companies to delay the payment of the dues of the financial sector from SMEs for a period of six months as of its date
  • SAMA is providing concession finance of about 13.2bn for SMEs to support business continuity
  • SAMA deposited an amount of SAR 6 billion for banks and financing companies to enable insurance entities to relieve SMEs from the finance costs of KAFALA Program (The Small and Medium Enterprises Financing Guarantee Program) for the purpose of minimizing finance costs. This is accomplished via supporting payment fees of all stores and entities in the private sector for a period of 3 months with an amount exceeding in total SAR 800 million
  • In March 2020, the authority decided to suspend freezes on client bank accounts for 30 days in specific situations, such as the expiration of identification documents, failure to meet the requirements of KYC, and changing the account status to inactive due to a lack of banking

Sultanate of Oman

  • In March 2020, the Central Bank of Oman(CBO) came up with a comprehensive stimulus package in addition to recommending a set of precautionary measures for the banking sector. Those measures are to inject additional liquidity of more than RO 8 billion to the economy
  • According to CBO guidelines, borrowers (particularly SMEs) can ask for deferment of loan instalment payments for the next six months starting March 2020
  • Interest rate on repo operations was reduced by 75 basis points to 0.50%, and the maximum period of repo operations was raised up to three months
  • It has been decided to raise the maximum permissible limit on investment in the Sultanate 'sovereign Development Bonds (GDB) and Sukuk from 45% to 50% of a Bank's net worth with immediate effect
  • CBO allowed banks to increase the financing ratio by 5 percent from 87.5 percent to 92.5 percent and to utilize the additional scope provided for lending/financing to productive sector of the economy including healthcare services
  • CBO asked banks to consider reducing existing fees related to various banking services and to abstain from introducing new ones during year 2020

State of Qatar

  • The Emir of Qatar directed Qatar Development Bank (QDB) to postpone the instalments of all borrowers for a period of six months starting from March 2020
  • In March 2020, the Qatar Central Bank reduced the lending rate by 100 bps to 2.50%, the deposit rate by 50 bps to 1.00% and the repo rate by 50 bps to 1.00% Government extended guarantees of QR 3 billion to local banks to support the affected sectors as part of the package
  • The Qatar Central Bank established appropriate mechanism to encourage banks to postpone loan instalments and obligations of the private sector with a grace period of six months and provide additional liquidity to banks operating in the country
  • Exempting hospitality and tourism sector, retail sector, SMEs, commercial complexes from electricity and water fees for a period of six months starting from March 2020 in exchange of providing services and exemptions to tenants and logistics area
  • Excepting the logistical areas and small and medium industries from rentals for a period of six months from March 2020

United Arab Emirates

  • In March 2020, the Central Bank of the UAE (CBUAE) announced a comprehensive AED 100 bn Targeted Economic Support Scheme to contain the repercussions of the COVID-19 pandemic
  • The CBUAE is allowing banks to free-up their regulatory capital buffers to boost lending capacity and support the UAE economy
  • From March 2020, all Banks operating in the UAE will have access to loans and advances extended at zero cost against collateral by the CBUAE
  • All banks were allowed to tap into a maximum of 60 percent of the capital conservation buffer, additionally, banks designated as systemically important by the CBUAE will be able to use 100 percent of their additional capital buffer for systemic importance
  • The CBUAE also reduced the amount of capital banks have to hold for their loans to SMEs by 15 to 25 percent. This change, which is broadly in line with the minimum standards set by the Basel Committee, will facilitate further access of SMEs to financing
  • The CBUAE revised the existing limit which sets maximum exposure that banks can have to the real estate sector. Banks are now allowed to increase it to 30 percent, but will be required to hold more capital.

Results Snapshot

Impact on Banking Sector: Credit Risk

Short-Term & Long-Term Implications
  • Obligators from tourism, hotel, airlines, automotive may seek liquidity and heavily draw their credit facilities
  • Uncertainty infinancial institutions around IFRS9 usage of scenarios and probabilities
  • Collective downgrading of behaviour-based rating system
  • Increase in non-performing loans and rise in credit quality deterioration
  • Automatic behaviour-based rating systems might downgrade and less sensitive ratings of large companies will require manual ad-hoc treatment
Action Points
  • Banks might want to reconsider their strategies and adjust the portfolio mix towards less affected sectors
  • Recalibration of rating models
  • Judicious use of regulatory deadline reliefs
  • Possible second wave effects and contagion effects among sectors to be considered
  • Consider inclusion of pandemic scenarios into credit stress testing

Impact on Banking Sector: Liquidity Risk

Short-Term & Long-Term Implications
  • Volatile oil prices could put pressure on government deposits
  • Corporate deposits withdrawal increase due to decreased revenue
  • Cost of funding might increase for those institutions with poor liquidity
  • Worsening of liquidity positions triggering early warning indicators
  • Prolonged crisis might generate retail panic and consequent market volatility
Action Points
  • Proper and timely reporting on key liquidity metrics
  • Recalibration of rating models-Scenario forecasting and proper monitoring around key liquidity outflows
  • Documentation of decisions taken during communication with Internal and External stakeholders
  • Activate customer retention programs
  • Disclosure of information like LCR and survival horizon could reassure investors and have a positive effect
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