Bigger picture testifies to Gulf banks’ innate strength

Key operating numbers are treading higher heading into 2019-20

The last three years have been challenging for GCC banks. However, absent any major oil or geopolitical risks, we expect the industry to breathe a little easier in 2019.

We expect lending to stabilise at around 5 per cent, no major drift in asset quality indicators, stable profitability benefiting from higher interest rates, and we believe that Gulf banks’ capitalisation will continue to support their creditworthiness. The transition to IFRS 9 meant that most GCC banks have now recognised the majority of the impact of the softer economic cycle on the quality of their assets.

The new reporting standard requires bank to set aside provisions based on loss expectations. This means that the buffer of provisions accumulated over the past few years is now stronger, giving banks the ability to withstand some stress.

We believe problematic loans will remain stable in 2019-20, barring any unexpected shock, keeping the cost of risk at around 1-1.5 per cent of total loans. Qatari banks are more vulnerable and we see a correlation between any potential escalation or deescalation of the boycott measures and deterioration of stabilisation of their ’ asset quality.

We expect banks to benefit from stronger GCC growth in 2019 supported by higher oil prices and public investment. We forecast oil prices at $65 per barrel in 2019 and $60 in 2020 and anticipate unweighted average growth of 2.8 per cent in 2019-20 for the GCC.

This will lead to a slight acceleration of lending to 5 per cent over the next 12 months, buoyed by this increase in government spending and execution of strategic initiatives. Profitability is expected to stabilise with return on assets at about 1.5-1.7 per cent and net interest margins at 3 per cent on average in 2018. Bank will benefit from higher interest rates and significant non-interest-bearing deposits on banks’ balance sheets.

These factors supports S&P Global Ratings average longterm rating of ‘BBB+’ as at November 15 for the 24 public banks under its coverage. What’s more, 75 per cent of this cohort of banks has a stable outlook.

A further factor contributing to these ratings is the strong capitalisation of GCC banks. GCC banks carry an unweighted average S&P Global Ratings risk adjusted capital ratio of 11.4 per cent at year-end 2017. Government support is another positive factor in GCC banks’ ratings.

International operations of some Gulf banks is a source of latent risks. Nevertheless, this risk is relatively confined to a small number of players.