Credit growth slowed in all but one GCC banking sector in the first quarter of 2021. After picking up pace in 2020 compared with 2019, credit growth slowed significantly in the first quarter of 2021 across the GCC, falling back to 5% year on year (y/y). Credit growth slowed in every country in the GCC compared with the end of 2020, except in Saudi Arabia, where it increased from its already rapid pace to reach nearly 15%. Conversely, in the UAE year-on-year (y/y) credit contracted slightly by 0.3%. Of most concern, the credit growth slowdown across the bloc occurred while all banking sectors had loan moratorium and other COVID19 related support measures in place (Oman’s loan moratorium expired at the end of March 2021).
Monolith therefore expects credit growth to slow further when these support measures are removed, and the after-effects of the early 2020 plunge in oil prices and the true impact of the pandemic channel through to the banking sector. On average, we expect credit growth across the block to decelerate in 2021, falling back to 4.7% y/y.
Asset quality will remain a lingering concern, although GCC banks maintain ample capital cushions. New end-2020 data released by the region’s regulators show that NPL ratios edged up across the GCC, with the exception of Bahrain. The largest increase was in the UAE, where the NPL ratio increased to 8.3%. Comparatively, the average NPL ratio across the region increased by around 2 percentage points between 2008 and 2009 during the global financial crisis and given elevated Stage-2 loans reported by individual banks, we believe that additional asset quality deterioration is forthcoming across the region.
Monolith expects NPLs to remain a concern as credit risks stemming from COVID 19 social distancing measures materialize on banks’ balance sheets following the expiration of support measures. Ultimately, banking sectors with elevated exposure to industries such as tourism and hospitality, construction, and cross-border trade – including Kuwait, Qatar, and the UAE – are likely to have more significant NPL accumulation. Nonetheless, capital buffers remain supportive. In fact, regulatory capital adequacy ratios (CAR) improved slightly in all banking sectors in the region for which end-2020 data are available, with the GCC ending 2020 with an average CAR of nearly 19%.
Outlook
Government support measures successfully propped up credit growth through 2020, but as we expected, banks are taking a more cautious approach to lending as economies are slow to reopen.
Monolith expects there to be additional credit growth slowdowns throughout the remainder of 2021 as banks tighten lending standards on the back of continued NPL increases.
Counteracting this tightening of lending standards will be the improved oil price outlook and COVID19 vaccine rollout that will support recoveries in regional macroeconomies and reduce pressure on GCC governments to enact extreme fiscal austerity.
As was the case in 2020, large and medium sized regional banks are expected to continue tapping international debt markets for funding as needed to capture low borrowing costs and bolster capital buffers in light of increasing provisioning needs and reduced profitability.