July 28, 2020 / 1:52 PM / 14 days ago

Coronavirus hits Gulf banks in Q2 but full impact of bad loans looms

* Most Gulf banks' profits hurt by impairment charges

* Repayment deferral schemes mask scale of bad loans

* More pressure on banks' provisioning seen in H2 - analysts

By Davide Barbuscia

DUBAI, July 28 (Reuters) - Most Gulf banks' profits plunged in the second quarter after a spike in impairment charges for expected credit losses, as regional economies reel from the double blow of low oil prices and the coronavirus outbreak.

But the banks may need to set aside even more money in the second half of the year to cover bad loans, as their full impact on banks has so far been curbed by stimulus measures allowing debt repayment delays, analysts say.

"Given that we have payment holidays, the current asset quality metrics as measured by the non-performing loans, still does not fully reflect the true size of these non-performing loans," said Ashraf Madani, a senior analyst at Moody's.

"Hence we expect further pressure on provisioning charge once those NPLs (non-performing loans) get reflected in the financial position of banks and as they move to stage 3."

Stage 3 loans are NPLs that require significant writedowns.

Saudi Arabia's largest lender, National Commercial Bank , saw its quarterly profit drop by 22.3% year on year to 2.1 billion riyals ($559.97 million) due to a decline in operating income and higher operating expenses.

"Total operating expenses including impairments were higher by 18.4% mainly due to higher net impairment charge for expected credit losses," the bank said in a bourse filing this week.

Emirates NBD, Dubai's largest bank, last week announced a 58% fall in second-quarter profit. It set aside over $1.1 billion so far this year to cover bad loans.

First Abu Dhabi Bank, the UAE' biggest lender, reported a 25% fall in profit on Tuesday, dragged down by another quarter of higher impairment charges.

DELINQUENCIES

Malik Zahir, chief investment officer for equity asset management at Bahrain-based SICO, said that compared to the first quarter, the increase in provisions among Gulf banks was not significant but that they will likely rise in the second half of the year.

"Almost all regulators have instructed the banks to defer loan instalments of clients exposed to the lockdown by circa six months, this has limited the growth in delinquency."

"In the case of the UAE, companies' layoffs have just started to gather pace, so we would see the delinquencies emanating from this probably in the third quarter," he said.

In Qatar, profits dropped sharply in the second quarter for Qatar National Bank, the Gulf's largest lender, which increased loan loss provisions to 1.5 billion riyals from 605.5 million a year earlier.

Qatari banks' profits and asset quality are likely to weaken this year, Fitch Ratings said this week, but the true impact will be masked in the short term by loan deferral schemes and regulatory flexibility for banks to recognise impairments under IFRS9 - an accounting rule introduced after the global financial crisis.

Dubai-based Arqaam Capital said on Tuesday that it expected total dividends per share and dividend pay-out ratios "to be cut substantially or fully cancelled" this year for most Gulf lenders. (Editing by Emelia Sithole-Matarise)

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