Gulf Banks Can Absorb $36 Billion in New Credit Losses, S&P Says

(Bloomberg) --

Banks in the Persian Gulf can absorb as much as $36 billion in new credit losses before their capital base starts to erode, placing them in a strong position to weather the current economic headwinds, according to S&P Global Ratings.

“Regional banks are highly profitable -- due to large proportions of non-interest-bearing deposits, sustainable sources of fee income and high operational efficiency” and they have “generous provision cushions built over recent years,” S&P said in a research note. “That will help them navigate the current economic rough waters.”

Gulf banks can sustain a hit of 2.7 times their average annual credit losses. Banks in Saudi Arabia are among the most resilient, while lenders in Bahrain are in a weaker position because of the economic shock there and the limited capacity of the government to offer support, according to the ratings firm. It could take as long as three years before credit losses flow through the banks’ financial statements, it added.

Despite their ability to absorb additional credit losses, banks’ profitability will deteriorate this year because of the impact of the coronavirus pandemic and lower oil prices. Banks are also likely to focus on preserving capital rather than generating new business, S&P said.

Banks in the Gulf have reported mostly lower first-quarter earnings in recent weeks as they book higher provisions for bad loans caused by the plunge in oil prices, the collapse of hospital operator NMC Health Plc and the economic fallout of the coronavirus pandemic.

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