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GCC banks to maintain stable financial profiles in 2020, says S&P

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Lower oil prices over the past five years, subdued credit growth as well as competition for deposits, higher cost of funds and deteriorating asset quality are driving consolidation for scale and to better compete in a crowded market.
THURSDAY 10, OCTOBER 2019

S&P Global said that rated banks in the GCC region should maintain stable financial profiles in 2020 without any major increase in geopolitical risk or a sharp fall in oil prices, however, risk related to geopolitical developments cannot be completely excluded as demonstrated by the recent attack on Saudi Aramco facilities.

According to S&P, GCC banks will navigate a less-than-favourable macroeconomic environment in 2020 supported by their solid financial profiles.

Regional lenders took the opportunity of the transition to IFRS 9 in 2018 and the amount of problematic assets is expected to remain stable.

Additionally, the economies of regional countries are projected to record stronger economic growth in 2020 after a dip in 2019 due to geopolitical tensions and the on-going US-China trade war.

S&P expects net lending expansion to remain flat, in the mid-single digits on average and the cost of risk to stabilise at around one per cent of total loans, due in part to the stronger buffer of provisions that GCC banks accumulated over the past few years and linked to IFRS 9.

Similarly, GCC banks' profitability is also expected to deteriorate slightly or stabilise at best—profits will be affected negatively by the shift in global monetary policy toward lower interest rates for longer.

The deteriorating profits have already triggered a closer look from banks' management toward operating costs through higher digitalisation and collaboration with fintech firms, said S&P.

The core business activities of banks across the region will be protected from fintech disruption and in the absence of credible alternatives for the financing of their economies, authorities in the GCC will continue to protect their banking systems, added S&P.

TAGS: GCC BANKS PROBLEMATIC ASSETS IFRS 9 GEOPOLITICAL TENSIONS US-CHINA TRADE WAR SAUDI ARAMCO
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