Report: GCC Banks to Stay Strong Next Year, but With Conditions

Published October 3rd, 2018 - 06:55 GMT
GCC banks have now recognized most of the impact of the softer economic cycle on their asset quality. (Shutterstock)
GCC banks have now recognized most of the impact of the softer economic cycle on their asset quality. (Shutterstock)

Banks in the Gulf Cooperation Council (GCC) should continue to breathe a little easier in the year ahead unless there is a major increase in geopolitical risk or a sharp fall in oil prices, a report by ratings agency S&P said on Monday.

According to the report, 2019 should mark a stabilisation of GCC banks' financial profiles, following three years of significant pressure.

"GCC banks have now recognised most of the impact of the softer economic cycle on their asset quality. The situation in Qatar will continue to depend on how the boycott on the country by its GCC neighbours evolves. We expect GCC economies to show stronger economic growth in 2019 of about 2.8 percent," S&P said in its report.

The report however noted that 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 stabilise at around 1 percent to one and half percent of total loans," S&P said.

The S&P report added that higher oil prices and stronger public investments are resulting in higher economic growth across the GCC in 2018."We forecast that oil prices will stabilise at about $65 per barrel in 2019 and $60 in 2020, and we anticipate unweighted average economic growth of 2.8 percent 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," the report added.

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On the subject of bank's lending growth, the report said growth in lending recovered slightly, reaching an annualised 4.7 percent at midyear 2018. S&P in its report pointed out that it expects a slight acceleration in the next two years barring any unexpected shock.
The ratings agency observed that higher government spending, supported by 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," the report said.

Regarding the non-performing loans (NPLs) of GCC banks, S&P said,"Paradoxically, the slowdown in economic activity over the past three years did not result in a significant increase in nonperforming loans (NPLs)." It said as of June 30, 2018, NPLs to total loans for the rated GCC banks reached 2.6 percent, compared with 2.4 percent at year-end 2015.

"A combination of write-offs and restructuring of exposures to adapt to the new economic reality explain this stable stock of problematic assets," the S&P report added.

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