Outlook for Gulf banks 'stable' as capital remains a 'solid shield' against risks, S&P says

Capital buffers are necessary due to the banks' relatively high sector-concentrations

Credit rating agency S&P Global Ratings gave 19 of the 24 Arabian Gulf banks it covers a stable outlook as the lenders continue to generate sufficient returns to cover their risks.

GCC banks are well-capitalised compared to their global peers, giving them a "solid shield" against risks, S&P said in a report.

"We think banks will continue to generate sufficient returns to cover their risks," S&P said. "This, among other factors, is the reason why most of our outlooks on rated GCC banks are stable."

Overall, GCC banks' exposure to risks and their ability to absorb them through earnings and capital have neutral or positive rating factor, the credit rating agency said.

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However, GCC banks' earnings will "stabilise" at lower levels this year due to the combination of higher provisions because of the introduction of the International Financial Reporting Standard No. 9, the introduction of VAT, and muted loan growth, it said.

"The implementation of International Financial Reporting Standard No. 9 (IFRS 9) will result in a higher, but still manageable, cost of risk for Gulf banks," according to the report.

While banks in the GCC tend to be among the most heavily deposit-funded and well-capitalised globally, they operate mainly in cyclical economies and carry greater concentration risk on both sides of the balance sheet than some other investment-grade banks, S&P said.

"As they continue to operate in the region's less-supportive economic environment, we expect lending growth to remain subdued and asset quality indicators to deteriorate slightly," the agency.