The last three years has been challenging for the GCC banking sector. However, absent any major oil or geopolitical risks, we expect the industry to breathe a little easier in 2019.
We expect lending to stabilise at around 5 per cent, no major drift in asset quality indicators, stable profitability benefiting from higher interest rates, and we believe that Gulf banks’ capitalisation will continue to support their creditworthiness. The transition to IFRS 9 meant that most GCC banks have now recognised the majority of the impact of the softer economic cycle on the quality of their assets.
The new reporting standard introduced at the start of 2018 requires bank to set aside provisions based on loss expectations. This means that the buffer of provisions accumulated over the past few years is now stronger giving banks the ability to withstand some stress.
We also believe the amount of problematic loans will remain stable in 2019-20, barring any unexpected shock, keeping the cost of risk at around 1-1.5 per cent of total loans. Qatari banks, which are being impacted by the boycott by other GCC states, are the exception. We view Qatari banks as more vulnerable and see an important correlation between any potential escalation or de-escalation of the boycott measures and deterioration of stabilisation of Qatari banks’ asset quality.
We expect banks to benefit from stronger GCC economic growth in 2019 supported by higher oil prices and public investment. While growth will still be below the era of triple-digit oil-prices, we forecast oil prices at $65 per barrel in 2019 and $60 in 2020 and anticipate unweighted average economic growth of 2.8 per cent in 2019-20 for the GCC.
This will lead to a slight acceleration of lending to 5 per cent over the next 12 months, buoyed by this increase in government spending and execution of strategic initiatives. Profitability is expected to stabilise with return on assets at about 1.5-1.7 per cent and net interest margins at 3 per cent on average in 2018. Bank will benefit from higher interest rates and significant non-interest-bearing deposits on banks’ balance sheets.
These factors supports S&P Global Ratings average long-term rating of ‘BBB+’ as at November 15 for the 24 public banks under its coverage. What’s more, 75 per cent of this cohort of banks has a stable outlook.
A further factor contributing to these ratings is the strong capitalisation of GCC banks. While capitalisation has weakened qualitatively and quantitatively, GCC banks carry an unweighted average S&P Global Ratings risk adjusted capital ratio of 11.4 per cent at year-end 2017.
Government support is another positive factor in GCC banks’ ratings. We continue to see the governments of four out of the six GCC countries as highly supportive of their banking systems, and we expect them to intervene and provide extraordinary support to systemically important banks.
International operations of some Gulf banks is a source of latent risks, especially for those banks which invested in Turkey given the depreciation of the lira and lacklustre performance of the economy. Nevertheless, this risk is relatively confined to a small number of players and some of them have the financial muscles to withstand additional risks.
Mohammad Damak is the Global Head of Islamic Finance at S&P Global Ratings.