Impact of IFRS 9 implementation will be manageable for GCC banks

Dubai: The implementation International Financial Reporting Standards 9 (IFRS 9) from January 1, 2018, a game changer for banks across the world, is expected to be manageable for the Gulf Cooperation Council (GCC) banks according to rating agencies and banking sector analysts.

IFRS 9 will require banks to take a more forward-looking approach to provisioning. At the moment, banks are required to set aside specific provisions only when they incur losses, or when the counterparty or financial asset defaults on its obligations. Under IFRS 9, banks will have to set aside provisions in advance, based on their loss expectations.

The new regulation strongly affects the way credit losses are recognised in the profit and loss (P&L) statement. While impairments are currently based on ‘incurred losses’, IFRS 9 introduces an approach based on future expectations, namely expected losses (EL).

“Our view that the impact of IFRS 9 will be manageable is due in part to the relatively conservative approach that GCC banks already take to calculating and setting aside loan-loss provisions. Some banks, for example those in Kuwait, take a conservative approach as part of local regulatory requirements to set aside general provisions for all their lending portfolios,” said S&P Global Ratings credit analyst Mohammad Damak (pictured above).

Under S&P’s base-case scenario, rated GCC banks will have to set aside additional provisions equivalent to 17 per cent of their net operating income on average following the adoption of IFRS 9. Excluding banks with no provision shortfall, the same measure rises to 27 per cent under the base-case scenario. However, these results mask significant differences between banks.

“We focus on GCC banks’ lending portfolios when it comes to estimating lifetime expected losses. The current financial disclosures do not allow us to calculate the potential impact of lifetime losses from other assets that are in scope of IFRS 9, such as financial instruments accounted for at amortised cost. However, we take the view that the effect of calculating the potential losses from these assets will be limited because of the relatively conservative approach that the GCC banks we rate take toward the quality of their investment portfolios,” said Damak.

The least affected rated banks would be in Kuwait. This is because the regulator already requires banks in Kuwait to set aside a general provision on their performing facilities equivalent to 1 per cent of cash facilities and 0.5 per cent of non-cash facilities.

The most affected rated banks would be in Qatar, primarily due to the specific cases of a couple of Qatari banks that have either seen a significant deterioration in their asset quality indicators, or an increase in past due but not impaired loans, over the past couple of years.

Despite the relatively low impact on provisioning, analysts say switching to IFRS9 will be challenging for GCC banks. The absence of a long default history in many countries, coupled with difficulties in correctly assessing collateral values and time frames for realisations, makes it particularly tricky to assess expected loan losses. Banks are working closely with their auditors and adapting technology and systems to make sure they can plug data gaps to model forward-looking losses.