Q&A with Roy Philip, senior executive vice-president and group chief credit officer, Mashreq Bank
Q: What is the impact of Covid-19 on the banking sector in the region?
We are staring at a recessionary situation in almost every market across the globe. The forecast is for a negative economic growth of about -3 per cent.
In the Middle East, we face a double impact. We have the health crisis-driven downturn. And we have the governments that are dependent on oil revenues. They now face the low oil price situation, widening fiscal deficits and the need to raise more money to manage these deficits.
Banks are grappling with two issues. One is the drying up of liquidity in the market, while the second is credit quality and the impact of credit risk on businesses in the region.
Regulators have stepped in with enough stimulus to ease liquidity. They have provided the opportunity for banks by injecting money at a lower rate of interest. Now the crisis situation is evolving and banks are working with customers and businesses to manage the situation and help them overcome this crisis as early as possible.
Q: What has been the impact on borrowing?
Demand for credit is slowing because in a crisis situation, most businesses scale back their expansion plans and the new projects they were planning. So the demand is getting less.
But they require credit to tide them over through the current cash flow issues because their turnovers have dropped about 30-40 per cent in the past two months. Cash flows are drying up and they need support from financial institutions to defer their payment liabilities for the next three to six months, or until the market slowly picks up and comes back to the old position.
The steps collectively taken by UAE banks through the UAE Banks Federation have been commendable and people are appreciating the support received from banks. We have also done a portfolio review and extended terms where people genuinely need support. We have done this across the retail portfolio as well, where people’s salaries are delayed, or are being reduced. Their repayment capacity is impacted. So we are fully embracing the individual borrowers and giving them time to work with us and pay as the market improves.
Q: Which sectors are the most vulnerable to long-term damage from this crisis?
Construction and contracting in the GCC is driven by government investments. So the impact of low oil prices will directly impact the construction contracting sector as investment slows down and new projects or works are delayed. Similarly, payments can sometimes be delayed and contractors can have liquidity issues.
Secondly, the execution of projects is slowed because of Covid-19. This is a labour-intensive industry, where the impact of Covid-19 in labour camps could impact the workforce and the ability to execute contracts on time.
On the real estate side, there was already a slowdown happening because of lack of demand and oversupply. So, some of the real estate projects have been slowed down in the region, particularly in the UAE. Some are on hold. This will have a profound impact on the real estate sector.
Hospitality is one of the worst affected sectors. Hotels are facing very low occupancy, and restaurants – normally popular among tourists buying food and beverages – are suffering badly. We have some fantastic restaurants in Dubai. All are now closed or working at a very low capacity, depending on takeaways and delivery. The time to recovery is very important for the revival of some of these industries and, for construction and real estate, a lot will depend on the recovery of the oil price.
Q: From a credit risk analysis perspective, how does the crisis affect the way you assess your customers?
On the contracting side, we are working with customers to defer some of their commitments in cases where they don’t get paid on time and there is a delay. The normal payment cycle is 90 days and now it’s getting stretched because the project owner is delaying payments. Then we step in to help by extending their terms. We are actively supporting these customers and working with them.
The second impact is less contracting work so their business capability and turnover will come down. Their revenue is going to come down. They will have to work on more and more contracts and keep things running to maintain the workforce. So in the longer term, there will be an impact. Then they will have to look at cost reductions, similar to what happened in 2008-09.
Q: What assumptions have you made for things like bad debts and non-performing loans?
We have undertaken various reviews of our portfolio. We have also used IFRS9 tools to assess the impact on the quality, credit quality and the risk charge.
We expect some impact on the credit quality. That is inevitable in this market because some of the small and medium-sized customers will probably get impacted more than others. Some sectors will be affected a little bit more. All of us are geared up for the drop in quality, and how to manage it.
So based on stress testing, we are planning the risk charge this year. And that is across the industry. We are taking proactive, remedial measures and are conservatively looking at our business plan this year.
We see opportunities to strengthen the relationships in this market by working closely with our customers. This is a time to show solidarity. We expect a good partnership to develop in these markets and we are proactively working with all our customers across both retail and corporate segments.
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