One year has passed since the start of the “COVID era” which triggered huge worldwide upheaval with little sign of abating.  For the majority of banks and financial lenders this has resulted in an obligation to support customers facing financial difficulty.  Such measures, activated through short-term and long-term flexible payment plans, ranged from restructuring, deferments, fixed payment arrangements, to payment holidays.  Whatever the plan, the end-result has had the same outcome — deferred payments to the bank. Sooner or later this WILL come to an end.

As specialists in credit risk management, Qarar has recommended banks and finance companies implement a strategic plan and start taking immediate action to safeguard future provisioning against the ongoing challenges and the looming end of payment schemes. Leading UAE-based newspaper, Gulf News, shared similar concerns.

Full article here:  GCC banks face risk of surge in loan impairments in 2021 | Banking – Gulf News

Their report special highlights how extended borrower support is masking asset quality risks, according to credit-rating agency, Fitch.  The economic shock and low oil prices have been the catalyst for asset-quality deterioration resulting in higher loan impairments and elevated provisions — the primary risk for banks in the GCC, which will undoubtedly affect profitability. 

Right now, support measures are in still place right through to the second half of 2021.  Across the GCC, many banks have taken advanced provisioning for expected credit losses, yet each individual country’s exposure to deferred payments varies, together with the associated risks.  Saudi Arabia and Oman have extended support to the end of March, Qatar to mid-June, and the UAE to the end of June.   In contrast, Kuwait ended payment holiday in September 2020.  According to Fitch, the banking sector in Kuwait and Saudi Arabia is the least vulnerable due to stringent credit structure and low rate of impaired loans prior to the pandemic.  In the UAE, however, deferred exposures could push the ratio up to 20% of total loans at the end of the payment holiday period.  The second half of 2021 will reveal the full extent of forbearance measures.  A strong economic recovery — especially in real estate and construction — will be a driving force in the recovery process.

Rating agency, Standard and Poor, expects banks in the GCC to undergo a gradual recovery in 2021.  Under IFRS9 the expected credit loss (ELC) there are 3 stages of loan impairment.  Loans reaching stage 3 — incurred loss — are currently being masked by the support measures.  When all the forbearance measures are withdrawn later this year, 2022 could prove to be challenging year of recovery for many banks in the region.

What can banks do right now?   The next four months or so are crucial — February to June 2021. Ringfencing, segmentation and monitoring of these customers is of critical importance.  This will have a dramatic effect on portfolio performance, profitability, and future capital provisions.  It is also imperative that for banks to re-activate payments as soon as there are any signs of recovery by taking into consideration various factors, namely internal credit and transactional behaviour, and external credit behaviour.   Over time, this course of action can be adjusted and enhanced, and is based on the outcome data resulting from the initial treatment.  The plan of action can be further refined by capturing additional collections data. 

Post-Deferment Best Practice Action: How Qarar can help

Qarar’s experience in advanced analytics, based on multiple sources of internal and external data and a hosted decision engine, together with a wealth of knowledge across our advisory team enables us to offer practical solutions to assist banks during this transition period.

Learn more about how we can assist banks and lenders: COVID-19 Solutions – Qarar