The rated banks in the GCC continued to display good asset quality indicators, profitability, and capitalisation in 2016 by global standards, albeit with signs of deterioration from 2015, said a report by S&P Global Ratings.

The weak economic environment will continue weighing on the financial profiles of banks in the GCC countries in 2017 and 2018, it stated.

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.

The end of the commodities boom has also increased the pressure on GCC banks' asset quality and profitability indicators, said the report.

"While we expect to see further weakening in some of these indicators in 2017-2018, we think that GCC banks have built sufficient buffers to make the overall impact on their financial profiles manageable," stated S&P Global Ratings in its review.

"Over the past year, we have taken several negative rating actions on banks in the GCC. Most of these 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," it stated.

Overall, 31 per cent of our rated banks in the GCC have negative outlooks or are on CreditWatch with negative implications.

"We believe that GCC banks' financial profiles will continue to weaken in 2017-2018, but we have already incorporated this in our ratings following our negative rating actions in 2016," said S&P in its review.

The three key risks that we foresee for GCC banks are a difficult operating environment, a higher cost of risk, and lower liquidity, the ratings agency pointed out.

However, most GCC banks have built sufficient capital buffers to remain resilient to their weakened operating environment, it added.

According to S&P, the end of the commodities super-cycle resulted in a significant slowdown of the GCC economies and reduced growth opportunities for their banking systems.

"We assume that oil prices will stabilize at $50 per barrel in 2017 and 2018, and forecast unweighted average economic growth for the six GCC countries of 2.2 per cent in 2017 and 2.5 per cent in 2018, " it added.

Growth in lending to the private sector halved to five per cent on average as of September 30, 2016, compared with 10 per cent in 2015.

"In 2017-2018, we expect this situation to continue as the government's policy response to lower oil prices continues to take the form of spending cuts and the postponement of infrastructure projects," said the ratings agency in its review.

"Under our base-case scenario, we expect private sector lending growth to reach 5 to 7 per cent on average for the banking systems of the six GCC countries for 2017-2018, supported by strategic initiatives such as the Dubai Expo 2020, the World Cup 2022 in Qatar, and the ongoing increase in government spending in Kuwait," it stated.

GCC banks remain well entrenched in their real economies. "The less-supportive economic environment leads us to think that a downward trend of asset quality indicators has started, it said.

"As of September 30, 2016, these indicators plateaued for the GCC banks in our sample, and we foresee deterioration in 2017-2018. We expect the downward trend to last for at least two years, barring any unexpected increase in hydrocarbons prices," noted S&P in its review.

"On a positive note, some regulators either have updated or plan to update their bankruptcy laws to make them friendlier for creditors, with the objective of encouraging restructuring for viable businesses. Overall, we consider that bankruptcy laws and asset foreclosures remain underdeveloped in the GCC compared with mature markets," it stated.

S&P said contractors, subcontractors, small and midsize enterprises (SMEs), and highly leveraged retail clients will drive the deterioration of asset quality, as the drop in economic prospects has a negative bearing on project pipelines, government subsidies, salaries, and job markets.

The greater exposure of some banks to the real estate sector, specifically some of the large Islamic banks, is also a factor to watch in the current asset quality cycle, specifically for the Kuwaiti, Omani, and the UAE markets, it added.-TradeArabia News Service