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S&P estimates effect of IFRS 9 on GCC banks
S&P estimates that GCC banks have made additional loan loss provisions equivalent to 1.1% of their loan portfolios as a result of implementing IFRS 9, which came into effect on 1 January 2018.
S&P calculates that the extra provisions are equivalent to one third of operating income before provisions, although this figure is only illustrative, since provisions taken on initial implementation of of IFRS 9 pass through equity. The agency estimates that GCC banks' risk-adjusted capital ratios have declined by 5.3% on average as a result of the initial implementation.
However, the impact varies significantly from country to country. Qatari banks are most affected, due to the boycott imposed by some Arab countries and the resulting strain on the country's real estate and hospitality sectors. S&P believes that a large number of exposures have moved, or will be moved, to 'Stage 2', under which provisions reflect exposure over the lifetime of the loan, rather than over the following 12 months, with the result that provisions are higher.
In the UAE, S&P expects that some government-related entities will need to re-finance their debts, and that this will drive higher provisioning requirements under IFRS 9.
S&P believes that Kuwaiti banks will be least affected by the transition to the new provisioning methodology, although Kuwaiti banks have to finalise with their regulator the assumptions that they will use for calculating the impact of the new rules on their loan portfolios.
S&P believes that GCC banks will prioritise loan quality over loan growth in the years ahead, in order to avoid the much higher provisions required for loans that are deteriorating or which face payment issues.
IFRS 9 addresses three issues: provisioning against credit losses, classification and measurement of financial assets and liabilities, and hedge accounting. Most of the impact of implementation comes from the provisioning change. S&P says that some banks have booked gains in their Other Comprehensive Income as a result of reclassifying at fair value some assets that were previously being held to maturity.
The rating agency does not expect to make any rating changes to GCC banks as a result of the cut-over to IFRS 9.
The S&P paper is called, 'GCC Banks' Transition to IFRS 9 Yields No Surprises' and is dated 28 May, 2018.
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