UAE banks gear up for IFRS 9 rules
The implementation of International Financial Reporting Standards 9 will have minimal impact on the UAE banks.
dubai — The impending implementation of International Financial Reporting Standards 9 (IFRS 9), which will mark a paradigm shift for banks worldwide, will have minimal impact on UAE banks, thanks to their relatively good earning capacity and conservative approach to provisioning, analysts said.
In the run-up to the adoption of IFRS 9 in January 2018, analysts at S&P Global Ratings said they expect GCC banks to show resilience to the change in reporting standard, with the impact on their financial profiles manageable on average.
The new worldwide regulation is expected to affect the way credit losses are recognised in the profit and loss statement of banks. While currently impairments are based on incurred losses, the IFRS 9, which is to be implemented on January 1, 2018, introduces an approach based on future expectations, namely expected losses, bankers explained.
Analysts at the ratings agency said the new regulation would require banks to take a more forwardlooking approach to provisioning.
Apart from additional provisioning, the US interest rate hikes that are driving the cost of funds, the implementation of Basel III and the liquidity capital ratio rules associated with it will have an impact on overall liquidity. Combined, all these new regulations are going to make the cost of doing business more expensive, they said.
They argued that higher provisioning would force banks in the GCC to review their capital requirements. Product mixes and business models will also need to be evaluated.
“At the moment, banks are required to set aside specific provisions only when they incur losses, or when the counterparty or financial asset defaults on its obligations. Under IFRS 9, banks will have to set aside provisions in advance, based on their loss expectations,” S&P analysts said in a report.
Our view that the impact of IFRs 9 will be manageable is due in part to the relatively conservative approach that GCC banks already take to calculating and setting aside loan-loss provisions Mohamed Damak, S&P Global Ratings credit analyst
“Our view that the impact of IFRS 9 will be manageable is due in part to the relatively conservative approach that GCC banks already take to calculating and setting aside loan-loss provisions,” said S&P Global Ratings credit analyst Mohamed Damak.
“Some banks, for example those in Kuwait, take a conservative approach as part of local regulatory requirements to set aside general provisions for all lending portfolios.”
He said under a base-case scenario, rated GCC banks will have to set aside additional provisions equivalent to 17 per cent of their net operating income on average following the adoption of IFRS 9. Excluding banks with no provision shortfall, the same measure rises to 27 per cent under the base-case scenario.
However, these results mask significant differences between banks. The least affected rated banks would be in Kuwait. This is because the regulator already requires banks in Kuwait to set aside a general provision on their performing facilities equivalent to one per cent of cash facilities and 0.5 per cent of non-cash facilities.
The most affected rated banks would be in Qatar, primarily due to the specific cases of a couple of Qatari banks that have either seen a significant deterioration in their asset quality indicators, or an increase in past due but not impaired loans, over the past couple of years.
“We calibrated our assumptions based on rated GCC banks’ balance sheet structures. The same methodology and assumptions might not be applicable to other banks or other jurisdictions,” S&P analysts said.
For banks in the UAE, IFRS 9 brings a fundamental change in the way provisions are made. Bankers said the new reporting regulation would impact the cost of provisions and ultimately profitability of banks, cost and availability of funds for customers.
This calls for change in the way risks are assessed and priced, said Abdul Aziz Al Ghurair, chairman of the UAE Banks Federation.
At a briefing session organised by the Dubai Financial Services Authority and the Institute of Chartered Accountants in England and Wales, panellists said IFRS 9 would introduce changes to the classification, measurement and impairment assessment requirements for financial instruments as well as new requirements for hedge accounting. It will change the way in which banks and other financial institutions account for loan losses on their balance sheets, imposing a longer, more forward-thinking view, they said.
Explaining the impact of the game-changing regulation, analysts said under IFRS 9, when a loan is first made or acquired, it is assessed for expected losses over an initial 12-month period and an upfront provision is booked automatically, triggering an immediate capital hit.
However, the impact of having to write provisions upfront will not be that significant for most GCC banks because they are already used to booking general reserves when they extend new loans, according to Eric DuPont, senior director, financial institutions at Fitch Ratings.
— issacjohn@khaleejtimes.com