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GCC banks’ financial profiles to stabilise with stable asset quality

Banks across the Gulf Cooperation Council (GCC) are expected to see stabilisation of the financial profiles and performance from the second half of 2018 after two years of significant pressure, according to S&P Global Ratings.

While analysts expect to see further easing of liquidity and funding with improvement in asset quality metrics in 2018, there is a likely spike in cost of risk across the board due to factors other than new loan impairments.
“We think that GCC banks’ cost of risk will increase in 2018 because of the adoption of IFRS 9. However, we think that the general provisions that GCC banks have accumulated over the years will help a smooth transition to the new accounting standard and the capitalisation is strong and banks have capacity to absorb mild increase in losses,” said Mohammad Damak, Senior Director, Financial Services at S&P Global Ratings.
The slowdown in economic activity over the past two years only resulted in a slight increase in nonperforming loans (NPLs). Going forward analysts expect NPL ratios to deteriorate further during the first six months of this year and progressively stabilise.

“We expect NPL ratios to continue to deteriorate in the next six months and then progressively stabilise, mirroring the stabilisation of the GCC countries’ real economy. Our expectation discounts any unexpected materialisation of geopolitical risk or any other shock in the commodities market. Overall, we do not expect the NPL ratio to exceed 5 per cent in the next 12-24 months,” Damak said.
Last year the increase in the annualised cost of risk was contained at 1.2 per cent for rated GCC banks, compared with 1 per cent in 2016. S&P expects a marginal increase in cost of risk this year.
The 2017 saw a slight improvement in rated GCC banks’ profitability, but analysts don’t think this situation will last. Some of the improvement is due to increasing amounts of earnings-generating assets and slightly higher interest margins. Banks have deployed their excess liquidity in government bonds, which earn more than either deposits with central banks or cash.
Improving local liquidity and the increase in the Federal Reserve’s interest rates, which local authorities (with the exception of Kuwait) mirrored to a slightly higher average interest margin in 2017.
Analysts think that 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 (VAT). Loan-to-deposit ratios have been on an improving trend over the past 12 months, meaning that deployment of funds rather than lack of liquidity is the new theme amid slowing credit demand.
Growth in private-sector lending continued to drop and reached an annualised 2.6 per cent on average in the first nine months of 2017, compared with 5.7 per cent in 2016.
“In 2018-2019, we expect this situation to continue due to reduced government spending (except in Kuwait). We expect private-sector lending growth to reach 3 to 4 per cent in 2018-2019, supported by strategic initiatives such as the Dubai Expo 2020, Saudi Vision 2030, the World Cup 2022 in Qatar, and higher government spending in Kuwait led by Kuwait 2035, a long-term development plan announced in early 2017,” Damak said.
Loan demand is also negatively impacted by subsidy cuts and VAT implementation in the UAE and Saudi Arabia. These measures are expected to dent consumer disposable income and demand. This will weaken the performance of consumer loans and of retail and commercial industries.
A gradual rebound in economic activity means lower growth opportunities for GCC banks. While the overall funding profiles have improved with abundance of liquidity in the banking systems, banks will find deployment of liquidity challenging and the overall loan growth in the region is expected to average 3 to 4 per cent next year. Going forward, banks are expected to see weaker top-line growth as banks are prioritising quality over quantity.

Source: Gulf News

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