S&P says GCC banks’ finances will stabilise this year following adjustment to cutbacks

The financial profiles of GCC banks are set to stabilise by the second half of this year as they absorb the effect of softer economic conditions over the past two years, according to a report by the rating agency Standard & Poor’s.

“GCC banks’ profitability will stabilise at a lower level than historically, underpinned by an increased cost of risk and the introduction of value added tax, some of which banks will pass on to their clients,” S&P said.

However, muted loan growth, higher cost of risk and the introduction of VAT in the region are likely to keep bank profits and lending growth lower than in past years, the report said. Most banks in the GCC will have realised the shock of sluggish economic growth on the quality of their assets by the middle of 2018, the report said, noting that this comes after two years of “significant pressure” on the sector.

In its corresponding sector outlook last year, S&P said “the end of the commodities boom” had increased pressure on banks’ asset quality and profitability in 2016 and that further weakening was likely into 2017 and this year. According to the report, GCC banks’ liquidity improved over 2017 and no major change is expected in 2018. Continued debt or sukuk issuance by GCC governments this year will absorb some of the liquidity without a major change in bank risk appetite.

However, the cost of risk to banks is set to increase this year because of their adoption of new IFRS 9 accounting standards, and the higher amount of restructured and past due loans on banks’ balance sheets.

Meanwhile, lending growth is expected to remain muted, S&P said, citing lower oil prices that have slowed GCC economies and reduced growth opportunities for their banking systems.

S&P forecasts an unweighted average economic growth of 2.5 per cent for the six GCC countries in 2018-19, less than half the growth in 2012. Private sector lending growth is forecast to rise to 3 to 4 per cent in 2018/19 from 2.6 per cent on average in the first nine months of 2017, supported by initiatives such as Dubai Expo 2020, Saudi Arabia’s Vision 2030, Kuwait’s Vision 2035 and the Fifa World Cup 2022 in Qatar.

A “surge in geopolitical risk and ensuing delays of some of these initiatives could severely affect our base-case scenario”, S&P said.

The majority (72 per cent) of S&P-rated banks in the GCC carry a stable outlook with strong capitalisation, although many Qatari banks carry a negative outlook owing to geopolitical factors, it added.

Other rating agencies have also predicted a stable outlook for GCC banks this year, noting their “resilience” against flat economic growth.