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.