Fitch Ratings considered that the deterioration in asset quality constitutes the main risk for banks operating in Gulf Cooperation Council (GCC) economies. It anticipated that the banks' asset quality metrics will weaken significantly in the 2021-22 period, once the coronavirus-related support measures expire. It said that the extension of loan deferral schemes and other support measures for borrowers in most GCC countries will delay but not prevent the recognition of problem loans in the second half of 2021. It noted that pressures on borrowers in the GCC could persist, despite the expected recovery in economic activity in 2021. It pointed out that banks in Kuwait and Saudi Arabia are the least vulnerable to rising asset quality risks, as they benefit from strong pre-pandemic credit fundamentals and from low levels of impaired loans. It added that the GCC banks' "front-loaded" provisions will limit additional impairment charges on banks. In parallel, the agency anticipated that the liquidity of GCC banks will be adequate in the 2021-22 period, supported by proceeds from sovereign debt issuances and by rising household savings. It noted that the pandemic did not trigger deposit withdrawals by governments or government-related entities, as authorities relied more on debt issuance than on asset drawdowns to fund their fiscal deficits. Moreover, it considered that the banks' capital buffers  are sufficient to absorb the anticipated deterioration in asset quality. It expected the average Common Equity Tier One ratio of GCC banks to decrease from 15.2% at the end of 2019 to 14.5% by end-2021, mainly due to weaker profitability metrics. It projected the gradual growth in lending and lower dividend payout ratios to ease the pressure on the banks' core capital ratios.
Source: Fitch Ratings