S & P Global, the global credit rating agency, predicted that Gulf banks will be stable in their performance and financial conditions starting in the second half of this year, after two years of considerable pressure on the sector.
The Gulf banking sector is expected to witness further improvements in asset quality standards, the agency said in a report, noting that there is a likely rise in the cost of risk on a large scale due to factors other than the defaults of new loans.
The agency said that banks will see an increase in the cost of risk during the current year due to adoption of the IFRS 9, asserting that the general provisions accumulated by Gulf banks during the past years will help them to move smoothly to the new accounting standard.
The slowdown in economic activity over the past two years has led to a slight increase in non-performing loans, while analysts expect non-performing loans to deteriorate further in the first six months of this year and gradually stabilize later.
"Our forecast reduces any unforeseen risk of geopolitical risks, or any other shock in the commodities market. Overall, we do not expect the NPL to exceed 5 percent over the next two years," the agency said. 1.2 percent for rated Gulf banks, compared to 1 percent in 2016, there is expected to be a marginal increase in the cost of risk this year.
The report pointed out that the year 2017 showed a slight improvement in the profitability of Gulf banks rated, but analysts do not believe the continuity of this situation, some of the improvement is due to the increase in the volume of income-generating assets, in addition to the rise in interest margins slightly, indicating that banks put their excess liquidity in Government bonds that earn more than cash deposits with central banks.
The report also pointed out that improved local liquidity and an increase in the rate of interest of the federal reserve was reflected by local authorities (excluding Kuwait) to a slightly higher average margin in 2017.
According to the report, analysts believe that the banking sector is stable at the level of profitability at a level below the historical level prior to the global financial crisis, backed by high cost of risk and the introduction of VAT.
On the other hand, the agency pointed to the continued decline in growth of lending to the private sector, during the first nine months of last year average of 2.6 percent, compared with 5.7 percent in 2016.
The agency expects the situation to continue because of the decline in government spending (excluding Kuwait). Private sector lending is expected to grow to 3 to 4 percent in 2018/2019, supported by strategic initiatives such as Expo Dubai 2020 and Vision 2030 and the 2022 World Cup. Qatar, and the rise in government spending in Kuwait due to the vision of Kuwait 2035.
"Domestic demand in the Gulf countries has been affected by negative borrowing with subsidies and the introduction of Value Added Tax (VAT) in the UAE and Saudi Arabia," the report said, noting that these measures are expected to affect consumer disposable income. Commercial and retail.
While public finances have improved with abundant liquidity in banking systems, banks will find a liquidity challenge and average loan growth in the region is expected to range between 3 and 4 percent next year.
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