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Mideast banks must minimise NPL consequences

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MUSCAT, MARCH 21 - The ongoing pandemic has resulted in Middle Eastern economies confronting severe repercussions, with banking institutions widely expected to experience companies defaulting on loans and cashflow problems.


In times of economic crisis, commercial banks with issues surrounding Non-Performing Loans (NPLs) must, however difficult, minimise such impacts and secure NPL portfolio value, according to a new report by Arthur D Little (ADL).


The report, titled ‘Non-Performing Loan Management: The case of setting up a Workout Unit,’ provides insights into how banks can mitigate NPL issues and offers a detailed overview of how to establish a dedicated Workout Unit.


“The COVID-19 pandemic has devastated economic activity across the globe and GCC countries have not been shielded from these effects,” said Philippe DeBacker, Managing Partner, Global Practice Leader Financial Services, at Arthur D Little.


“Major disruptions to the hospitality, retail, F&B, and travel and tourism sectors will severely impact both companies’ financials and overall employment levels in the GCC countries. This will, in turn, hinder the ability of GCC banks’ corporate and retail customers to repay loans and honour other commitments.”


As per the report’s findings, the current crisis will impact banks with a significant degree of strain. While banking sector problems in the 2007 financial crisis resulted in liquidity problems in the overall economy, the current dilemma has already been unequivocally defined as a ‘real’ economic crisis.


The severe GDP declines following pandemic-inducted lockdowns will have a devastating effect on companies and retail customers’ creditworthiness, something that directly affects players in countries across the Middle East.


“Looking ahead, it’s inevitable that NPL figures will rise quite substantially in the next year or two,” explained Nima Obbohat, Partner, Global Head of Banking, Arthur D Little. “Given the implications of rising NPLs on profitability and capital position of banks it’s crucial to be well prepared and make the necessary adjustments ahead of time.”


The turbulent financial climate from a regional perspective has been reaffirmed by S&P Global’s 2021 Banking Outlook, which details why current events and those that will transpire in the near future represent the most challenging test for banks in over a decade.


In terms of the UAE, a slowing economy will weaken banks’ asset quality and profitability.


With the national economy expected to contract by approximately 8.5 per cent in 2020, a mild recovery in 2021 is the most likely outcome.


Although regulatory forbearance measures delay the recognition of problems, assets-quality indicators will be affected by a less resilient macroeconomic environment and continued correction in the real estate sector.


Moreover, the relaxation of certain prudential requirements carries risks for the national banking sector.


“So far, we do see a rather small uptake in NPL numbers at major financial institutions and the national level for all GCC countries,” revealed De Backer. “We believe GCC banks became much more adept in handling NPL situations after the previous crisis, improving their capital position considerably. However, we are also of the view that a major uptake of the NPL levels across the region is not preventable. GCC banks should, with this in mind, have a strategy ready to go as soon as possible to manage their balance sheets through 2023.”


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