GCC banks to maintain stable credit ratings

GCC banks will successfully navigate a less-than-favourable macroeconomic environment in 2020 supported by their solid financial profiles, a leading global ratings agency said.

"We believe that GCC banks' financial profiles will remain stable in 2020, absent any unexpected shocks. In our view, the two main sources of latent risk for GCC banks are geopolitical risk and a significant drop in oil prices, with the former including a potential full-scale military intervention in the region and the latter a weaker global economy," S&P Global Ratings said in a report.

In 2018, the UAE banking sector maintained its position as the largest in the Arab world with the combined assets of all banks growing 6.5 per cent to Dh2.87 trillion as the amount of credit extended grew 5 per cent to Dh1.66 trillion, according to the UAE Banks Federation (UBF). "As the sector embraces new initiatives and developments, and with increased regulation and compliance requirements, prospects for 2019 and beyond appear promising," it said in a statement.

"The UAE banking and financial sector has maintained its robustness and high performance with a strong and diversified national economy, a safe and stable political and economic climate at the national level, and the optimal use of financial and human resources," said Abdul Aziz Al Ghurair, chairman of the UBF.

The S&P report said rated banks in the GCC should maintain stable financial profiles in 2020, barring any major increase in geopolitical risk or a sharp fall in oil prices.

Ratings agency's base-case scenario continues to exclude a full-scale military intervention in the region or a disruption in oil production or supply.

Analysts at S&P said GCC banks took the opportunity of the transition to International Financial Reporting Standards (IFRS) 9 in 2018 to recognise the effect of the softer economic cycle on their asset quality indicators in a relatively conservative manner.

"Therefore, we believe that the number of problematic assets, which we define as IFRS 9 Stage 2 and 3 loans, will likely remain stable, but we do not exclude transition between the two categories," they said.

The ratings agency expects GCC economies to show modestly stronger economic growth in 2020 after a dip in 2019 primarily explained by the effect of the aforementioned event on Saudi Arabian growth. However, GCC countries' growth will remain below that seen during the era of triple-digit oil prices, the report said.

"Growth will also likely be constrained against the backdrop of a broader global slowdown. We therefore expect net lending expansion to remain flat, in the mid-single digits on average. At the same time, we expect cost of risk will stabilise at about 1 per cent of total loans, due in part to the stronger buffer of provisions that GCC banks accumulated over the past few years and linked to IFRS 9," it said.

S&P analysts also expect that GCC banks' profitability would deteriorate slightly or stabilise at best. They believe that profits will likely be negatively affected by the shift in global monetary policy toward lower interest rates for longer.

"We think this is already triggering a closer look from banks' management toward operating costs, including through higher digitalisation and collaboration with fintech firms. We still believe that Gulf banks' core business activities [lending to corporates and retail clients] will be protected from fintech disruption. In the absence of credible alternatives for the financing of their economies, authorities in the GCC will continue to protect their banking system, while at the same time supporting fintech companies through accelerators and sandboxes," they said.

Most banks in the GCC, however, continue to display strong capitalisation by global standards. Over the past year, S&P has affirmed most of its ratings on banks in the GCC.

"We have taken a couple of positive actions because of upcoming mergers or our view of higher systemic importance. We have also taken a few negative rating actions, primarily because of a deterioration in the operating environment [local or international]. In addition, we have highlighted the risks posed by the faster accumulation of external debt by the Qatari banking system, especially in a volatile geopolitical context," it added.

- issacjohn@khaleejtimes.com

Issac John

Editorial Director of Khaleej Times, is a well-connected Indian journalist and an economic and financial commentator. He has been in the UAE's mainstream journalism for 35 years, including 23 years with Khaleej Times. A post-graduate in English and graduate in economics, he has won over two dozen awards. Acclaimed for his authentic and insightful analysis of global and regional businesses and economic trends, he is respected for his astute understanding of the local business scene.