GCC banks’ balance sheets could stabilize in 2019: S&P

The profitability of GCC banks will stabilize in 2019, benefitting from the higher interest rates and the significant amount of non-interest-bearing deposits sitting on banks' balance sheets, S&P Global noted in a recent report.

It however added Gulf banks’ financial profiles could stabilize next year, if there is no unexpected geopolitical or oil-price shock.

“Banks in the GCC should continue to breathe a little easier in the year ahead. Barring any major increase in geopolitical risk or a sharp fall in oil prices -- not our base case scenario -- 2019 should mark a stabilization of GCC banks' financial profiles, following three years of significant pressure,” the ratings agency said in the report.

Noting that banks’ lending growth is recovering slightly, 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,” it added.

The report added the slowdown in economic activity over the past three years did not result in a significant increase in non-performing loans.

“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,” it added.

Noting that due to IFRS 9 the buffer of provisions that GCC banks accumulated over the past years is now stronger, the report maintained the amount of problematic assets will likely remain stable.

“With the transition to IFRS 9, the amount of problematic loans stood on average at around 16 percent of total loans for banks that reported these numbers. However, a few top tier banks and a couple of banks that benefit from a niche position displayed stronger metrics. Under our base-case scenario, we believe that the amount of problematic loans will remain stable in 2019-2020 barring any unexpected shock,” it noted.

S&P however maintained that international operations could pose a latent risk for some GCC banks. “A few banks with exposure to Turkey will see some impact on their asset quality,” it noted.