Fiscal and monetary support helped GCC banks fend off Covid-19 driven crisis

Profitability of regional lenders is expected to improve next year on the back of an economic recovery

A man walks past a branch of Bahrain's Al Baraka Bank in Algeria. The lender's chief executive Adnan Yousif says GCC banks should see improved profitability next year. Reuters

Monetary and fiscal support by governments and central banks have helped regional banks and financial institutions weather the worst of the Covid-19-induced crisis, according to Al Baraka Bank's chief executive.

Banks should expect lower provisions for bad loans next year and an improvement in profitability as economic growth picks up following twin shocks of Covid-19 and lower oil prices, Adnan Yousif told The National.

But it will still take at least two years for lenders to see their profitability return to pre-Covid-19 levels, said Mr Yousif, who also heads the Bahrain Association of Banks and is a former chairman of the Union of Arab Banks.

“I think a big part of that is behind us. I would not say 100 per cent of it, but for sure, a big portion of that,” he said.

Globally, bank profits fell as lenders increased their provisions for bad loans because of the pandemic, which severely impacted the travel and tourism industries and as a result of lockdowns led to a slow down in economic activity and rising unemployment. Concerted action by central banks and governments across the world cushioned the impact of the pandemic on banks and averted a credit crunch similar to the 2008 global financial crisis.

Governments around the world, including those in the Gulf region, rolled out more than $12 trillion in fiscal stimulus, with central banks providing $7.5tn in monetary support.

“Central banks did a fantastic job … and their reaction was very positive,” Mr Yousif said.

“They have [already] done enough” by pumping ample liquidity in the system, he said.

The Central Bank of the UAE was among the first banking regulators in the Middle East and North Africa region to take action in March with its Targeted Economic Support Scheme (Tess).

The scheme was introduced as part of an initial package worth Dh100bn, which was later upsized to Dh256bn and offered zero-cost collateral funding to banks to boost lending. The plan's validity has been extended until June, 30, 2021 to further support the economy.

Saudi Arabia, the biggest Arab economy, launched 142 stimulus initiatives with a total value of 214 billion Saudi riyals ($57bn) since the outbreak. In June, the Saudi Central Bank injected 50bn riyals into its banking sector to boost liquidity and the lending capacity of financial institutions.

Bahrain's central bank also provided payment deferral schemes and eased capital requirements for lenders to boost liquidity in the system amid the Covid-19 health crisis.

“We are very happy with GCC central banks,” Mr Yousif said. “Our governors, it is easy to work with them, they listen, they communicate,” he added.

Still, lenders globally face a long road of recovery despite an improvement in economic outlook and optimism about vaccines, therapeutics and diagnostic tools for Covid-19.

“Banks will take hit”, from provisions at the end of the year, and  may report smaller profits, Mr Yousif said. But provisions for non-performing loans will begin to taper in 2021 and bottom lines of lenders will improve as GCC economies continue to recover, he said.

Banks that have regional and international presence are positioned for a quicker recovery compared with those who operate in a single country, he said.

The performance of regional lenders has been historically linked to government spending, but financial institutions need to expand beyond home markets and diversify their portfolios, Mr Yousif said.

“In the Gulf countries, for example the UAE and Saudi Arabia, banks are huge. They are bigger than the market I would say,” he said.

“They have to look for other [markets] for investment”, especially now as buying banking assets is cheaper given lower valuations.

In May, Mr Yousif told The National that Al Baraka wanted to expand in Asia and buy banking licences in markets like India, China and Indonesia. Those plans are now delayed until the end of next year or 2022, due to high economic uncertainty in these markets.

“With the current situation, we are going to wait,” he said. “Economies of these countries have not settled – still [fluctuating] up and down. I have to see growth for at least one year.”