Banks in the GCC are expected to see improved financial stability in the year ahead, said S&P Global Ratings in a new report.

Barring unforeseen events, 2018 will mark the stabilization of the financial profiles and performance of GCC banks, after two years of significant pressure, according to the report titled "GCC Banks Should See A More Stable Financial Footing In 2018”.

What's more, GCC banks will have recognized most of the impact of the softer economic cycle on their asset quality by mid-2018. “Relatively sluggish economic conditions will also keep lending growth muted, as we do not expect oil prices to rebound significantly,” the report said.

GCC banks' cost of risk is expected to increase in 2018 because of the adoption of IFRS 9 and the higher amount of restructured and past due but not impaired loans sitting on their balance sheets.

“However, we also think that the general provisions that GCC banks have accumulated over the years will help a smooth transition to the new accounting standard. GCC banks' liquidity improved in 2017, and we do not foresee a major change in 2018. Continued debt or sukuk issuance by the GCC governments in 2018 will absorb some of the liquidity without a major change in GCC banks' risk appetite.

“Finally, we think that GCC banks' profitability will stabilize at a lower level than historically, underpinned by an increased cost of risk and the introduction of value added tax, some of which banks will pass on to their clients,” the report said.

Supporting the ratings, banks in the GCC continue to display strong capitalization by global standards, albeit with signs of quantitative and qualitative deterioration.

“We have taken a few negative rating actions, most of them on banks in Bahrain, Oman, and Qatar. Overall, 28 per cent of our rated banks in the GCC currently have a negative outlook. They are concentrated in Qatar, due to the potential effect of the boycott on Qatari banks' funding profiles, asset quality, and profitability, but there are a few banks in other GCC countries where idiosyncratic reasons drive our negative outlook,” said S&P Global Ratings. – TradeArabia News Service