As we are heading towards the end of a whirlwind year, GCC banks have a long way to go to recover from the shockwaves of the Covid-19 pandemic. Next year will still have some challenges for banks in the UAE, as their asset quality and profitability are forecast to weaken on the back of a continued slowdown in the economy and real estate sector. Low oil prices, coupled with ongoing mitigating measures, such as the postponement of debt payments, could also result in more bad debts piling up due to which we anticipate that NPLs will reach a peak in 2021.
Our base case scenario is that a Covid-19 vaccine will be widely available by around mid-2021 and that the oil price will stabilize. We also foresee that the GCC economies will expand by an average of 2.4 percent in 2021, compared with a contraction of 5.6 percent in 2020.
A second wave of mergers and acquisitions (M&A) could start when the full impact of the weaker operating environment on banks becomes apparent. In the first wave, we have seen that M&A was mainly driven by shareholders’ desire to re-organize their assets. The second wave, however, will be more opportunistic and driven mainly by economic rationale. The operating environment might push some banks to find a stronger shareholder or to join forces with other banks to enhance their resilience. For example, this might involve consolidation across the different GCC countries or the different emirates in the UAE.
In terms of the different GCC banking systems, we think that the UAE will manage the crisis sooner and that Oman and Bahrain will take longer to recover than the rest.