Tuesday 09, January 2018 by Jessica Combes

GCC banks should see a more stable financial footing in 2018

Banks in the Gulf Cooperation Council should breathe a little easier in the year ahead, according to a report published today titled, GCC Banks Should See A More Stable Financial Footing In 2018, published by S&P Global Ratings.

Banks in the Gulf Cooperation Council should breathe a little easier in the year ahead, according to a report published today titled, GCC Banks Should See A More Stable Financial Footing In 2018, published by S&P Global Ratings.

S&P believes that barring unforeseen events, 2018 will mark the stabilisation of the financial profiles and performance of GCC banks, after two years of significant pressure.

What's more, GCC banks will have recognised most of the impact of the softer economic cycle on their asset quality by mid-2018, except for Qatar, where trends in asset quality will depend on how the boycott of the country evolves. Relatively sluggish economic conditions will also keep lending growth muted, as we do not expect oil prices to rebound significantly.

GCC banks' cost of risk will likely increase in 2018 because of the adoption of IFRS 9 and the higher amount of restructured and past due but not impaired loans sitting on their balance sheets. However, it is also likely that the general provisions that GCC banks have accumulated over the years will help a smooth transition to the new accounting standard. GCC banks' liquidity improved in 2017, and no major change in 2018 in foreseen.

Continued debt or Sukuk issuance by the GCC governments in 2018 will absorb some of the liquidity without a major change in GCC banks' risk appetite. Finally, GCC banks' profitability will probably 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.

Supporting the ratings, banks in the GCC continue to display strong capitalisation by global standards, albeit with signs of quantitative and qualitative deterioration. Over the past year, S&P has affirmed most of its ratings on banks in the GCC. The agency has taken a few negative rating actions, most of them on banks in Bahrain, Oman, and Qatar. Overall, 28 per cent of rated banks in the GCC currently have a negative outlook. They are concentrated in Qatar, due to the potential effect of the boycott on Qatari banks' funding profiles, asset quality, and profitability, but there are a few banks in other GCC countries where idiosyncratic reasons drive our negative outlook.

  

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