Dubai: The most significant change that will come into force following implementation International Financial Reporting Standards 9 (IFS 9) will be the change in the reporting style.
When IFRS9 comes into force in January 2018, GCC banks will be required to recognise and provide for expected credit losses on loans. They currently report under IAS39, which means they write provisions when losses are incurred, and face supplemental additional requirements set by local regulators. Across the Gulf Cooperation Council (GCC) banks keep relatively high level of general reserves to protect banks against unexpected losses.
The main impact on banks is the need to recognise expected losses (EL) for all financial products, and at individual and grouped-asset levels. Banks will have to update their calculation at each reporting date to reflect changes in the credit quality of their assets. This will significantly increase the number and frequency of impairment quantifications that must be undertaken and the amount of data that must be processed for such purpose.
But for GCC banks, the additional provisioning burden may not pose significant impact on balance sheets. Banks operating GCC countries may face lower loan loss requirements under IFS 9 rules because these may well be less onerous than current provisioning requirements, according to Fitch Ratings.
“Under IFS 9, when a loan is first made or acquired, it is assessed for expected losses over an initial 12-month period and an upfront provision is booked automatically, triggering an immediate capital hit. Positively for most GCC banks, the impact of having to write provisions up front will not be that significant because they are already used to booking general reserves when they extend new loans,” said Eric Dupont, Senior Director Financial Institutions at Fitch Ratings said in a recent note.
A 1 per cent general reserve on all on-balance-sheet loans is required in Kuwait (plus a 0.5 per cent reserve on off-balance-sheet exposures) and Saudi Arabia, while Oman differentiates by type of loan, applying a higher 2 per cent reserve for higher-risk personal loans.
In the UAE, banks need to hold reserves equivalent to at least 1.5 per cent of weighted credit risks — this generally works out at below 1 per cent of gross loans because facilities extended to public sector entities are 0 per cent risk weighted — while Bahrain and Qatar adopt a more bespoke approach.
Among the GCC regulators the Kuwaiti regulator is particularly tough and loan loss coverage ratios for the Kuwaiti banks are ample, around 260 per cent. This is due to the Central Bank of Kuwait’s unique requirement for additional case-by-case ‘precautionary’ provisions, which depends on the outcome of portfolio reviews.
Analysts say, in general, regulators across GCC may not be willing to allow the write-back of existing reserves because they are keen for banks to preserve existing buffers to protect themselves against unexpected losses.
“We think the toughest supervisors, such as those in Kuwait and Saudi Arabia, are likely to be reluctant to allow banks to cut back on their current high levels of loan loss reserves once IFRS9 is enforced. A compromise between auditors and regulators may have to be reached,” said Dupont.