“We also anticipate that Islamic banks’ asset quality will stabilise by mid-year 2018 with the exception of Qatari banks, where we still see some increasing risks,” said Mohamed Damak, global head of Islamic finance at S&P Global Ratings.
S&P expects GCC Islamic banks’ total asset growth will remain in the low single digits over the next 12-24 months, after stabilising at about four per cent for the GCC system in 2017.
‘That said, we expect cost of risk for Islamic banks will rise, due to the adoption of International Financial Reporting Standard (IFRS) 9 and Financial Accounting Standard 30. This increase, combined with the impact from the introduction of value-added tax, will result in a dip in the profitability of Islamic banks in the next two years’, S&P said.
‘We also note, though, that GCC Islamic banks included in our sample saw growth in customer deposits recover slightly in 2017, a trend that we expect will continue. This was the result of stabilised oil prices and the channelling of higher public-sector deposits to the banking systems’, it said. S&P said the GCC Islamic banks continue to display strong capitalisation by international standards, with an unweighted average tier-1 ratio of 17.6 per cent at year-end 2017.
“We consider the three main risks to GCC Islamic banks’ financial stability are regional geopolitical tensions, higher cost of risk, and lower profitability,” Damak added.