S&P predicts strong third quarter for Gulf banks

The ratings agency said that even though interest rates are low, the reductions in banks’ non-performing assets should offset the contraction in net interest margins.

The ratings agency upgraded the standalone credit profile of Mashreq and changed the outlook to “positive” on the back of improving asset quality and financial performance. Satish Kumar / The National

Improving asset quality and declining credit losses will add up to healthy third-quarter earnings for the region’s banks, says Standard & Poor’s.

With the release of quarterly results coming soon, S&P predicted in a report yesterday that the banks will sustain their strong performance – and should continue to do so into 2016.

The ratings agency said in a report yesterday that even though interest rates are low, the reductions in banks’ non-performing assets should offset the contraction in net interest margins.

“Prospects for economic growth in the Gulf region remain healthy for the next few years,” analysts at S&P said in the report. “We expect most Gulf banks to continue to benefit from robust corporate activity and consumer consumption over the next 18 to 24 months. The many infrastructure projects planned in the Gulf should translate into sustained streams of corporate lending.”

The UAE has benefited from its safe haven status, and banks have received an abundance of liquidity following the regional unrest that began in 2011.

“Over the past three years, strong liquidity flows into the Gulf’s deposit markets have supported the region’s,” the report said.

The ratings agency upgraded the standalone credit profile of Dubai-based Mashreq and changed the outlook to "positive" on the back of improving asset quality and financial performance.

And in July, S&P changed its outlook on Abu Dhabi Commercial Bank to positive.

In March, the agency assigned National Bank of Fujairah a stable outlook and a BBB+/A-2 rating.

However, Bahrain-based BMI Bank’s long-term rating was lowered by one notch after its merger with Al Salam Bank, which is also Bahrain-based.

S&P’s report comes as equity analysts take a cautious view on Saudi banks, which are expected to face challenges on income revenues after the central bank introduced new rules to protect consumers.

The regulations from the Saudi Arabian Monetary Agency cap retail lending at banks and limit the fees they are allowed to charge on loans and auto finance. The rules are expected to dent profit growth for Saudi lenders with retail focuses.

Saudi stocks have rallied of late since the announcement that the kingdom was making tangible steps to open up its companies to foreign investors by the first half of next year.

Banking shares have rallied more than 20 per cent, compared with 14 per cent for the country’s Tadawul equity index.

Shuaa Capital is “cautious on the kingdom’s banking sector valuations”, the Dubai-based investment bank said. They are now trading at a 50 per cent premium to the emerging markets average on trailing price to book – the highest since 2009, analysts at Shuaa said.

“In light of further operationally challenging quarters ahead (loan growth decelerates, net interest margin pressures persist, cost of risk will remain volatile), we look for further pull back for better entry points to KSA banks,” Shuaa said. “We await third quarter results to revisit our stock recommendations.”

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