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Why 2018 will be a good year for Gulf banks

Banks in the Gulf Cooperation Council (GCC) should breathe a little easier in the year ahead, according to a report by S&P Global Ratings. The ratings agency believes that barring unforeseen events, 2018 will mark the stabilization of the financial profiles and performance of GCC banks, after two years of significant pressure.

What’s more, GCC banks will have recognized most of the impact of the softer economic cycle on their asset quality by mid-2018.

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That’s except for Qatar, where trends in asset quality will depend on how the boycott of the country evolves. Relatively sluggish economic conditions will also keep lending growth muted, as we do not expect oil prices to rebound significantly.

“We think that GCC banks’ cost of risk will increase in 2018 because of the adoption of IFRS 9 and the higher amount of restructured and past due but not impaired loans sitting on their balance sheets. However, we also think that the general provisions that GCC banks have accumulated over the years will help a smooth transition to the new accounting standard,” the report notes.

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“GCC banks’ liquidity improved in 2017, and we do not foresee a major change in 2018. Continued debt or sukuk issuance by the GCC governments in 2018 will absorb some of the liquidity without a major change in GCC banks’ risk appetite.”

“Finally, we think that GCC banks’ profitability will stabilize at a lower level than historically, underpinned by an increased cost of risk and the introduction of value added tax, some of which banks will pass on to their clients.”

 Supporting the ratings, banks in the GCC continue to display strong capitalization by global standards, albeit with signs of quantitative and qualitative deterioration, the report adds.

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“Over the past year, we have affirmed most of our ratings on banks in the GCC. We have taken a few negative rating actions, most of them on banks in Bahrain, Oman, and Qatar. Overall, 28% of our rated banks in the GCC currently have a negative outlook,” it maintains.

“They are concentrated in Qatar, due to the potential effect of the boycott on Qatari banks’ funding profiles, asset quality, and profitability, but there are a few banks in other GCC countries where idiosyncratic reasons drive our negative outlook.”

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While noting that lending growth across the GCC will remain muted, S&P added that asset quality indicators are likely to stabilize. The report also termed GCC banks’ funding profiles as satisfactory, while adding that profitability will plateau, but at a lower level than historically. It also adds that the capitalization is strong and is expected to remain so.