Financial profiles of banks in the GCC will further weaken this year and next as softer economic environment will continue to weigh on the regional lenders.
The three key risks that could affect the banks progress in the next two years are the difficult operating environment, a higher cost of risk, and lower liquidity in the region. However, most banks have built sufficient capital buffers to remain resilient, rating agency Standard and Poors said in its latest report on the regions banking sector.
The end of the commodities super-cycle has resulted in a significant decline in the economic prospects of the GCC region, implying lower growth opportunities for its banking systems and deteriorating liquidity, S&Ps global ratings credit analyst Mohamed Damak said, adding that, the banks are also seeing increased pressure on asset quality and profitability indicators.
The rating agency expects to see further weakening in some of these indicators in 2017-2018, however, the capital buffers at the banks will make the overall impact manageable.
Damak said that he banks rated in the GCC display good asset quality indicators, profitability, and capitalisation in 2016 when compared with global standards. However, there were signs of deterioration in comparison to 2015.
S&P over the past year, has taken several negative rating actions on banks in the GCC, most of which were concentrated in Bahrain, Oman, and Saudi Arabia.
While we have taken a few negative rating actions in other GCC countries, these were primarily for idiosyncratic reasons. Overall, 31 of our rated banks in the GCC have negative outlooks or are on CreditWatch with negative implications, according to the report.
Banks this year have so far reported moderate to negative growth in profitability as operating costs spiked on the back of provision for non-performing loans. With the exception of few, most banks in Saudi Arabia have reported quarterly and yearly bottom line number below analysts estimates.
Lenders in Oman and Qatar have so far reported mixed results with flat to moderate growth in profitability and some even reporting losses. The majority of the banks in the UAE have not yet reported their full-year 2016 results.