Dubai: GCC banks are expected to maintain stable financial profiles in 2020, barring any major increase in geopolitical risk or a sharp fall in oil prices, according to global credit rating agency Standard & Poor’s.
S&P continues to exclude a full-scale military intervention in the region or a disruption in oil production or supply. “In our view, GCC banks will successfully navigate a less-than-favourable macroeconomic environment in 2020 supported by their solid financial profiles,” said Mohammad Damak, Senior Director & Global Head of Islamic Finance, Financial Services Research, S&P Global Ratings.
Growth in net lending of GCC bank recovered slightly, reaching an annualised 5.3 per cent at midyear 2019. S&P analysts expect a slight acceleration in 2020 barring any unexpected shock. Higher government spending, supported by strategic government initiatives will support lending growth. In Saudi Arabia, we expect mortgage lending to be the primary component of loan growth.
The muted economic activity of the past four years did not result in a significant increase in non-performing loans (NPLs). At June 30, 2019, NPLs to total loans for the rated GCC banks reached 2.8 per cent, compared with 2.4 per cent at year-end 2015. Analysts said that a combination of write-offs, restructuring of exposures to adapt to the new economic reality, and tighter underwriting standards explain this stability.
First-half 2019 saw a slight decline in rated GCC banks’ profitability. S&P expects this trend will continue. The drop is underpinned by the compression of margins in the aftermath of interest rates cuts by GCC central banks, which followed the US Federal Reserve. Additional upcoming cuts are expected to pressure banks’ margins further.
“We expect that GCC banks’ profitability will deteriorate slightly or stabilise at best. Profits will likely be negatively affected by the shift in global monetary policy toward lower interest rates for longer. We think this is already triggering a closer look from banks’ management toward operating costs, including through higher digitalisation and collaboration with fintech firms,” said Damak.
Analysts said they still believe that Gulf banks’ core business activities (lending to corporates and retail clients) will be protected from fintech disruption. In the absence of credible alternatives for the financing of their economies, authorities in the GCC will continue to protect their banking systems, while at the same time supporting fintech companies through accelerators and sandboxes.
As cost of risk is not likely to decline because of IFRS 9 [International Financial Reporting Standards 9] implementation and the still uncertain economic environment, banks are adopting a more-aggressive approach toward their cost management. They will also try to leverage technology and redeploy staff or close branches. In the UAE, the number of bank branches has been declining since December 2014, suggesting that banks have managed to migrate some transactions to alternative channels.
Banks in the GCC continue to display strong capitalisation by global standards. Over the past year, we have affirmed most of our ratings on banks in the GCC.