'What's more, the GCC banks will have recognised most of the impact of the softer economic cycle on their asset quality by mid-2018. 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,' the ratings agency said in a report titled 'GCC Banks Should See A More Stable Financial Footing In 2018'.
It said that GCC banks' cost of risk will increase in 2018 because of the adoption of IFRS9 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 the GCC banks have accumulated over the years will help a smooth transition to the new accounting standard.'
S&P said GCC banks' liquidity improved in 2017 and it does 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 the banks' risk appetite, it added.
'We think that GCC banks' profitability will stabilise 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, S&P said banks in the GCC continue to display strong capitalisation by global standards, albeit with signs of quantitative and qualitative deterioration.
'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 per cent of S&P rated banks in the GCC currently have a negative outlook.