DOHA: After facing three years of significant pressure, the GCC banks’ financial profile should remain stable in 2019, absent any unexpected geopolitical or oil-price shock.
The banks’ lending growth should stabilise at around the 5 percent mark over the next 12 months, as higher oil prices and stronger public investments raise economic growth in the region overall, S&P Global said yesterday.
“We expect profitability to stabilise--with return on assets at about 1.5 percent-1.7 percent and net interest margins at 3 percent on average in 2018--benefitting from the higher interest rates and significant non-interest-bearing deposits on banks’ balance sheets,” the global ratings agency noted.
It said International operations could pose a latent risk for some GCC banks. Three-quarters of the 24 GCC banks it rates carry a stable outlook.
With the transition to IFRS 9, GCC banks have now recognized most of the impact of the softer economic cycle on their asset quality. The ratings agency, therefore, believe that the amount of problematic assets, which it defines as IFRS 9 Stage 2 and 3 loans, will likely remain stable.
S&P Global expects GCC economies to show stronger economic growth in 2019 of about 2.8 percent. However, this growth will still be below the triple-digit oil-price era growth of 2011-2013. It therefore expects lending growth to remain at around the mid-single digits.
At the same time, S&P thinks that cost of risk will stabilize at around 1 percent-1.5 percent of total loans. Thanks to IFRS 9, the buffer of provisions that GCC banks accumulated over the past years is now stronger.
The new reporting standard, adopted from the start of this year, required banks to set aside provisions in advance, based on their loss expectations. The banks will benefit from the higher interest rates and the significant amount of non-interest-bearing deposits sitting on banks’ balance sheets.
Higher oil prices and stronger public investments are resulting in higher economic growth across the GCC in 2018.
“We forecast that oil prices will stabilise at about $65 per barrel in 2019 and $60 in 2020, and we anticipate unweighted average economic growth of 2.8 percent in 2019-2020 for the six GCC countries. This is less than a half of what they delivered in 2012, but more than five times higher than their performance in 2017,” the global ratings agency noted
Growth in the GCC lending recovered slightly, reaching an annualized 4.7 percent at midyear 2018. S&P expects a slight acceleration in the next two years barring any unexpected shock.
“Higher government spending, supported by strategic government initiatives, will support the lending growth. Nevertheless, a surge in geopolitical risk or a significant drop in oil prices, and ensuing delays of some of these initiatives and in overall consumer confidence, could severely affect our base-case scenario.”
On the banks’ asset quality, the ratings agency noted that the slowdown in economic activity over the past three years did not result in a significant increase in nonperforming loans (NPLs). As of June 30, 2018, NPLs to total loans for the rated GCC banks reached 2.6 percent, compared with 2.4 percent at year-end 2015.
A combination of write-offs and restructuring of exposures to adapt to the new economic reality explain this stable stock of problematic assets. Restructured loans and past due but not impaired loans saw a higher increase, reflecting corporate entities’ longer cash flow cycles and challenges related to specific economic sectors, such as the real estate and hospitality sectors.
“We view the GCC banks’ funding profiles as satisfactory. Funding is dominated by core customer deposits, and the use of wholesale funding remains limited except for a few large and sophisticated issuers. The GCC banking system’s loan-to-deposit ratio averaged 88.4 percent at June 30, 2018, compared with 87.8 percent at year-end 2017, ranging from a high 110.7 percent to a low 51.2 percent.”
