ABU DHABI: The year 2019 (calendar year) should mark a stabilization of GCC banks’ financial profiles, following three years of significant pressure, according to a recent report by S&P Global Ratings.
The report said the banks in the Gulf Cooperation Council (GCC) should continue to breathe a little easier in the year ahead. “Barring any major increase in geopolitical risk or a sharp fall in oil prices -not our base case scenario – 2019 should mark an altogether better year for GCC banks,” it said.
What’s more, with the transition to IFRS 9, GCC banks have now recognized most of the impact of the softer economic cycle on their asset quality. “We therefore believe that the amount of problematic assets, which we define as IFRS 9 Stage 2 and 3 loans, will likely remain stable, but do not exclude transition between the two categories,” the report noted.
The situation in Qatar, according to S&P Global Ratings, will continue to depend on how the boycott on the country by its GCC neighbors evolves. “We expect GCC economies to show stronger economic growth in 2019 of about 2.8 per cent (unweighted average of Saudi Arabia, Kuwait, the UAE, Qatar, Bahrain, and Oman).
However, this growth will still be below the triple-digit oil-price era growth of 2011-2013. Therefore the lending growth is expected to remain at around the mid-single digits. “At the same time, we think that cost of risk will stabilize at around 1 per cent-1.5 per cent of total loans. Thanks to IFRS 9, the buffer of provisions that GCC banks accumulated over the past years, is now stronger. The new reporting standard, adopted from the start of this year, required banks to set aside provisions in advance, based on their loss expectations.”
S&P Global Ratings believes that GCC banks’ profitability will stabilize. It will benefit from the higher interest rates and the significant amount of non-interest-bearing deposits sitting on banks’ balance sheets.
Supporting the ratings, banks in the GCC continue to display strong capitalization by global standards, albeit with signs of qualitative deterioration. Over the past year, S&P has affirmed ratings on most of the 24 banks it rates in the GCC. “We have taken a few negative rating actions, most of them on banks in Bahrain and Qatar. We upgraded one bank in the UAE based on our view of its higher systemic importance and higher expected government support,” the report added.
Overall, 25 per cent of the S&P rated banks in the GCC currently have a negative outlook, two-thirds of which are in Qatar, due to the potential effect of the boycott on Qatari banks’ funding profiles, asset quality, and profitability. There are also a couple of other banks elsewhere in the GCC, where higher risks from their international operations drive our negative outlook.