(Report by S&P Global Ratings)
Banks in the Gulf Cooperation Council (GCC) should continue to breathe a little easier in the year ahead. Barring any major increase in geopolitical risk or a sharp fall in oil prices -not our base case scenario – 2019 should mark a stabilization of GCC banks’ financial profiles, following three years of significant pressure.
What’s more, with the transition to IFRS 9, GCC banks have now recognized most of the impact of the softer economic cycle on their asset quality. We therefore believe that the amount of problematic assets, which we define as IFRS 9 Stage 2 and 3 loans, will likely remain stable, but do not exclude transition between the two categories. The situation in Qatar will continue to depend on how the boycott on the country by its GCC neighbors evolves. We expect GCC economies to show stronger economic growth in 2019 of about 2.8% (unweighted average of Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman).
However, this growth will still be below the triple-digit oil-price era growth of 2011-2013. We therefore expect lending growth to remain at around the mid-single digits. At the same time, we think that cost of risk will stabilize at around 1.0%-1.5% of total loans. Thanks to IFRS 9, the buffer of provisions that GCC banks accumulated over the past years is now stronger. The new reporting standard, adopted from the start of this year, required banks to set aside provisions in advance, based on their loss expectations.
Finally, we think that GCC banks’ profitability will stabilize. It will benefit from the higher interest rates and the significant amount of non-interest-bearing deposits sitting on banks’ balance sheets.
Supporting the ratings, banks in the GCC continue to display strong capitalization by global standards, albeit with signs of qualitative deterioration. Over the past year, we have affirmed ratings on most of the 24 banks we rate in the GCC. We have taken a few negative rating actions, most of them on banks in Bahrain and Qatar. We upgraded one bank in the UAE based on our view of its higher systemic importance and higher expected government support.
Overall, 25% of our rated banks in the GCC currently have a negative outlook, two-thirds of which are in Qatar, due to the potential effect of the boycott on Qatari banks’ funding profiles, asset quality, and profitability. There are also a couple of other banks elsewhere in the GCC, where higher risks from their international operations drive our negative outlook.
-GCC banks’ financial profiles should remain stable in 2019, absent any unexpected geopolitical or oil-price shock.
-Bank lending growth should stabilize at around the 5% mark over the next 12 months, as higher oil prices and stronger public investments raise economic growth in the region overall.
-We expect profitability to stabilize–with return on assets at about 1.5%-1.7% and net interest margins at 3% on average in 2018–benefitting from the higher interest rates and significant non-interest-bearing deposits on banks’ balance sheets.
-International operations could pose a latent risk for some GCC banks. A few banks with exposure to Turkey will see some impact on their asset quality.
-Three-quarters of the 24 GCC banks we rate carry a stable outlook. Negative outlooks are concentrated in Qatar and on a few banks in other GCC countries due to higher risk in their international operations. The average GCC bank rating is ‘BBB+’.
Lending Growth Is Recovering Slightly
Higher oil prices and stronger public investments are resulting in higher economic growth across the GCC in 2018. We forecast that oil prices will stabilize at about $65 per barrel in 2019 and $60 in 2020, and we anticipate unweighted average economic growth of 2.8% in 2019-2020 for the six GCC countries. This is less than a half of what they delivered in 2012, but more than five times higher than their performance in 2017.
Growth in lending recovered slightly, reaching an annualized 4.7% at midyear 2018. We expect a slight acceleration in the next two years barring any unexpected shock. Higher government spending, supported by strategic government initiatives, will support the lending growth. Nevertheless, a surge in geopolitical risk or a significant drop in oil prices, and ensuing delays of some of these initiatives and in overall consumer confidence, could severely affect our base-case scenario.