Under International Financial Reporting Standards 9, banks disclose the breakdown of their portfolio by different stages defined in the standards
The impact of GCC banks adopting International Financial Reporting Standards 9 has been “manageable” in the year since they were implemented, according to a new report from S&P Global Ratings.
Under IFRS 9, banks disclose the breakdown of their portfolio by different stages defined in the standards. All S&P’s rated GCC banks have done so, with the exception of Kuwaiti banks.
According to the report, a “less supportive economic environment” has led to slight deterioration in the asset quality indicators of regional banks, particularly in the UAE and Saudi Arabia. Stage 3 loans comprised 3.1 percent of their total loans at the end of 2018, compared to 2.6 percent at the end of 2017.
Kuwait was found to be the only country where the asset quality indicators of rated banked improved, although S&P attributes this more to write-offs than to a genuine improvement in the underlying asset quality.
Over the next 12 to 24 months, S&P expects GCC banks’ stock of problematic loans (those after stage 2 or 3) to remain stable, although some stage 2 loans will migrate to stage 3.
If the GCC manages to maintain its rate of slight economic recovery, the pace of migrations is expected to slow when compared to those of 2018. If oil prices fall significantly past a base scenario of $60 per barrel, that the asset quality indicators will weaken further.
The report also found that the average cost of risk for rated GCC banks fell by 10 basis points compared to 2017, despite an increase in non-performing loans.
S&P attributes this to IFRS 9, where the opening impact is charged to the bank’s equity ad not to its income statement.
“Despite that transition and the fact that banks had to take the hit up front, most of the banks decided to maintain a stable charge in their income statement,” the report noted. “It is worth noting that cost of risk dropped…in the UAE and was stable in all the other countries.”