Once the dust generated by the COVID-19 pandemic settles, the GCC banking industry could witness a wave of mergers and acquisitions (M&A), according to S&P Global Ratings.
“The current environment might push some banks to find a stronger shareholder or join forces with peers to enhance resilience. We think a second wave of M&A might involve consolidation across different GCC countries,” the rating agency noted in its latest Industry Report Card.
This would require more aggressive moves by management than those seen in the past. The added hurdles of convincing boards and shareholders, who face the possibility of seeing their assets diluted or losing control, might be easier if they have to recapitalize their banks anyway.
On the regional banks’ funding and liquidity, the rating agency noted the banks’ funding profiles remain strong in most GCC countries. The use of wholesale or external funding sources by regional banks remains relatively limited and it doesn’t think this will change in the short term.
In Qatar, the banking system still carries significant net external debt. “We think that this position will reduce because of COVID-19-induced market volatility. We also take comfort from the government’s strong capacity and willingness to provide the sector with support in case of need. The government of Qatar and its related entities injected up to $42.5bn in 2017 to help the banking system deal with boycott-related outflows”, it noted.
In response to the COVID-19 pandemic GCC governments have announced several measures to help corporates and retailers navigate the challenging environment. Some governments have opted for reduced taxes and levies. Other have asked banks to extend additional subsidized loans to affected clients to maintain employment and avoid production capacity destruction during what is expected to be a short-term event.
In this environment, S&P sees banks in the UAE, Oman, and Bahrain as the most exposed. For Oman and Bahrain, the lack of capacity to support the banking system (in the form of capital injections if needed) means that these governments would need to prioritize the allocation of their limited financial resources if the shock is stronger than expected.
In Qatar, the rating agency expects direct intervention in terms of exposure buybacks or capital injection should the need arise. The rating agency believes that Qatari banks’ asset-quality indicators might weaken but the large state footprint in the economy will act as a backstop.
To assess the financial performance of Islamic and conventional banks in the GCC, S&P used a sample of 16 Islamic banks and 26 conventional banks with total assets in excess of $2.2 trillion and sufficient financial disclosures.
