Qatari banks exposed to new banking bad loan rules

Qatari lenders are particularly exposed to new accounting rules aimed at providing for the possibility of bad loans according to a new report. (AFP)
Updated 29 May 2018
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Qatari banks exposed to new banking bad loan rules

  • New rules address bad loan provisions
  • Boycott hits real estate and banking sectors

Qatari banks have been hardest hit by new accounting rules aimed  at ensuring Gulf lenders have put enough aside to cover potentially bad loans, according to a new report.

Gulf lenders have shown “resilience” to the new accounting rules introduced at the start of the year, according to S&P Global.

The agency said that the impact of the regulation on the region’s banks “appears manageable” due to the quality of investments held by the financial institutions and their limited trading activities.

But it said that Qatar’s banks have been the most affected by the rules, due in part to the impact of the ongoing boycott of the Gulf state by several Arab countries.

“In particular the pressure on Qatar’s real estate and hospitality sectors, are continuing to exacerbate banks’ provisioning needs, in our view,” the report said.

While the average additional provision is around 1.5 percent of total loans, the agency noted that there are significant differences between Qatari banks where the minimum increase was 0.5 percent and maximum was 2.8 percent.

Due to a combination of tighter regulation and a weak operating environment, S&P Global predicted that most of the region’s banks will continue to avoid high-risk transactions which could limit loan growth.

The cost of risk will also continue to increase, the ratings agency forecasted.

“Most banks will likely continue prioritizing loan quality over quantity and shy away from lucrative but higher-risk exposures,” the report said.

The rules — known as IFRS 9 — were introduced worldwide following criticism of the previous system where banks only had to set aside provisions once they incurred losses. This led to delays in recognizing credit losses during the global financial crisis.

Under the new regulations, banks need to put aside provisions in advance, based on expectations of losses.

On average, GCC banks rated by S&P Global needed to put aside an additional provision of 1.1 percent of the banks’ total loans, or 5.3 percent of their total adjusted capital.

In the UAE, declining real estate prices have pushed up the country’s provisioning needs, the agency said. Banks have also put provisions aside on legacy loans.

In Saudi Arabia, S&P Global said that the country’s “still muted” economic performance coupled with problems with contractors and the real estate sector led to higher average additional provisions among the country’s banks.

Kuwaiti banks were the least vulnerable to the impact of the rules for the immediate future, the rating agency said.

This is mainly due to the banks having not finalized with the country’s regulator how they will calculate the impact of the extra provisioning on their loan portfolio. S&P Global estimated that overall additional provisions will be around 0.7 percent of total loans on average.


Aramco to shift more crude production to petrochemicals

Updated 4 min 26 sec ago
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Aramco to shift more crude production to petrochemicals

  • Aramco has been boosting its investments in refining and petrochemicals to secure new markets for its crude
  • Aramco hired JP Morgan and Morgan Stanley to advise on a potential acquisition of as much as a 70 percent stake in SABIC

RIYADH: Saudi Aramco aims to allocate some 2-3 million barrels per day of its crude oil production to petrochemicals, CEO Amin Nasser said on Tuesday, a sign the state energy group is hedging its bets against a possible demand slowdown.
Aramco has been boosting its investments in refining and petrochemicals to secure new markets for its crude, as it sees growth in chemicals central to its downstream expansion strategy.
The company is working on buying a stake in Saudi Basic Industries Corp. (SABIC), the world’s fourth largest petrochemical maker, as part of plans to become a leader in the chemical industry, Nasser told an investment conference in Riyadh.
But anti-trust regulations abroad will mean that the company’s planned acquisition of a controlling stake in SABIC will take time, he said, noting that SABIC has a presence in 50 countries around the world.
Aramco hired JP Morgan and Morgan Stanley to advise on a potential acquisition of as much as a 70 percent stake in SABIC, currently held by Saudi Arabia’s Public Investment Fund, sources said in July.
Nasser said the Saudi Arabian government was still committed to an initial public offering of Aramco, while the timing depended on market conditions and other factors. He added that Aramco could not list while the SABIC deal was ongoing.
Nasser also said bankers had not expressed any concerns about a recent rise in Saudi funding costs ahead of the company’s potential acquisition of the SABIC stake.
“Aramco is well positioned financially,” Nasser told reporters on the sidelines of an investment conference in Riyadh. “So far we have no issue to finance any of our projects. I don’t anticipate seeing any issues in financing.”
He also said it would take Aramco three months to reach maximum oil production capacity of 12 million bpd, if needed.
Aramco plans to raise its refining capacity to between 8 million and 10 million barrels per day, from some 5 million bpd now, and double its petrochemicals production by 2030. Aramco pumps around 10.7 million bpd of crude oil.