LONDON: Qatari banks are the “most vulnerable” in the Gulf region due to the risk of a deterioration in the quality of their assets, according to a report by ratings agency S&P Global.
Excluding Qatar National Bank, the loan books of the rest of the Gulf country’s banking sector faces increasing pressure from the continued boycott imposed by other Gulf states, coupled with a drop in real estate prices and hotel occupancy rates.
“We see an important correlation between any potential escalation or de-escalation of the boycott measures and deterioration or stabilization of Qatari banks’ asset quality,” the report published on Monday said.
S&P’s report also noted the risks posed by Gulf banks’ international operations, specifically the sector’s exposure to Turkey.
A number of the region’s banks have stakes in Turkish institutions, and have been left exposed to the recent sharp deterioration in the Turkish lira, and the “lackluster” economic performance of the country.
“Those GCC banks with exposures in the country will see some impact on their asset quality indicators,” the report read, noting that the risk is limited to just a few institutions with some of them equipped with the “financial muscle” to absorb the risk.
The overall financial profile of GCC banks should remain stable in 2019, S&P Global forecast, with profitability likely to “stabilize” as banks benefit from higher interest rates, in line with the higher US Federal Reserve rates.
Banks’ fortunes will also be buoyed by the increase in oil prices seen this year and anticipated economic growth in the region.
S&P forecast that oil prices will stabilize at $65 per barrel in 2019 and $60 by 2020. It estimated that growth will reach an average of 2.8 percent in 2019 for the six GCC countries.
Commenting on the report’s findings, Ehsan Khoman, Dubai-based head of regional research and strategy at MUFG Bank, said that there could be a “mild” increase in non-performing loans in the region, particularly in certain sectors.
“Following the challenging operating environment in recent years owing to weaker economic activity across the GCC, the loan performance of regional financial institutions has been subdued,” he said.
“In this context, non-performing loans may edge up, albeit mildly, across the region with sectors sensitive to fiscal consolidation through spending rationalization, such as real estate and construction feeling the pinch more noticeably.”
He tempered his comments, noting that the region’s banks are now better equipped to deal with the risks of deteriorating assets.
“The introduction of a number of regulatory frameworks, such as credit bureaus and credit-management tools, could improve GCC financial institutions’ risk controls and provisioning levels,” he said.
Khoman also sees Gulf banks benefiting from an improving business environment in the next year.
“GCC financial institutions are likely to benefit from continued benign deposit growth in 2019, owing to higher government deposits stemming from both higher oil receipts, as well as their continuous strategy of tapping international markets to fund their investment programs and fiscal deficits,” he said.
“Following the challenging period of lower for longer oil prices between mid-2014 and mid-2017, the intense funding pressures for GCC financial institutions has been broadly lifted. In-turn, with oil prices hovering near four year highs at the current juncture, domestic liquidity within the GCC banking system has been significantly restored.”