NPL ratios are likely to increase moderately

The non-performing loans (NPL) ratios of GCC banks are expected to see a gradual increase in the next 12 to 24 months while the overall size of problem assets is expected to remain stable, according to rating agency Standard & Poor’s.

GCC banks’ NPL ratios deteriorated only slightly over the past 12-24 months, which according to S&P analysts is somewhat surprising, considering the severity of the economic shocks in their home countries over that period.

To understand the dynamics of the asset quality cycle in the GCC, S&P broadened its analysis to capture additional indicators, such as past-due but not impaired loans, and restructured exposures.

“We have observed a visible increase in these two indicators over the past couple of years, since banks usually prefer to readjust their payables to changes in their clients’ cash flows rather than classify loans as being in default,” said Mohammad Damak, senior director of Financial Services at S&P Global Ratings.

S&P’s comprehensive asset quality metrics, including these two indicators, show that Gulf banks have around 2.7 times more problem assets than the NPL ratios indicated at year-end 2017.

S&P analysts expect the overall size of problem assets to remain stable in the next 12-24 months with a NPL ratio below 5 per cent.

“This is because we are of the view that the economic environment is stabilising, although we continue to see pockets of risk in the real estate, construction, and hospitality sectors,” said Damak.

Although the continued decline in real estate prices might reduce the asset quality of Emirati banks, S&P expects the deterioration to remain contained. Saudi Arabian banks’ NPL formation will continue to depend on the health of the contracting sector.

Pressure

Qatari banks’ asset quality is expected to remain under increasing pressure. The boycott of Qatar by a group of Arab states since early June 2017 is dampening economic activity, including the real estate and hospitality sectors, which in turn is weakening the asset quality indicators of Qatari banks.

“We see an important correlation between any potential escalation or de-escalation of the boycott measures and deterioration or stabilisation of Qatari banks’ asset quality,” Damak said.

More than one third of S&P-rated banks in the GCC have expanded outside the region over the past decade with the objective of diversifying their asset and income bases and reduce vulnerability in their oil-dependent home nations.

“Egypt and Turkey were the preferred destinations for banks we rate, although we saw some of them expanding into Europe and Asia.

“Since we hold a more negative view on the economies of Egypt and Turkey than on those in the GCC, we have adjusted our opinion of the stand-alone creditworthiness of Gulf banks that extended their operations to these countries, particularly if they lacked sufficient capital injections to back external acquisitions,” said Damak.