Dubai: After going through a period of balance sheet repair and asset price recovery, Gulf banks are expected to see a period of gradual rise in non performing loans (NPLs).
Healthy economic growth, recovering corporate sector activity, and gradual appreciation in asset prices helped most GCC banks improve their key asset quality metrics over the past few years. Consequently, the ratio of NPLs to gross loans for the 26 banks S&P rate the GCC gradually declined to 2.2 per cent by year-end 2014, from 4.2 per cent in 2010.
“We now expect a clear reversal, and foresee a gradual build-up of NPLs in 2015 and 2016. During the past three years, asset prices for real estate and equities, for instance, have been strong in the Gulf, which helped banks in their loan recovery efforts, given the increase in the value of collateral. Today, we no longer view asset prices as a positive factor in recovery,” said Standard & Poor’s credit analyst Timucin Engin.
S&P expects continued volatility in equities market, given the correlation with oil prices. In addition, the agency sees the real estate market to weaken, and even see room for some correction this year in the UAE.
On the bright side, GCC banks markedly increased coverage of loan losses in the past few years, with the coverage ratio at a healthy 137 per cent in 2014. Over the next two to three years banks are expected to continue to gradually increase coverage and build up additional cushions, a trend that regulators in the region generally support.
Asset quality improvements were more pronounced in the UAE and Kuwait in 2014. In Kuwait, the improvement in reported asset quality metrics for Kuwait Finance House arose mainly from some reclassifications. Similarly, in the UAE, the reclassification of an exposure to a large Dubai government-related entity (GRE) to performing contributed to a decline in NPLs.