The impact of International Financial Reporting Standard (IFRS) 9 “Financial Instruments” on the financial profiles of the rated banks in the Gulf Cooperation Council (GCC) will be manageable, S&P Global Ratings report noted yesterday.
IFRS 9 is due to be implemented on January 1, 2018, and will require banks to take a more forward-looking approach to provisioning. At the moment, banks are required to set aside specific provisions only when they incur losses, or when the counterparty or financial asset defaults on its obligations.
Under IFRS 9, banks will have to set aside provisions in advance, based on their loss expectations.
“Our view that the impact of IFRS 9 will be manageable is due in part to the relatively conservative approach that GCC banks already take to calculating and setting aside loan-loss provisions,” said S&P Global Ratings credit analyst Mohamed Damak.
“Some banks, for example those in Kuwait, take a conservative approach as part of local regulatory requirements to set aside general provisions for all their lending portfolios.” Under our base-case scenario, rated GCC banks will have to set aside additional provisions equivalent to 17 percent of their net operating income on average following the adoption of IFRS 9. Excluding banks with no provision shortfall, the same measure rises to 27 percent under the base-case scenario. However, these results mask significant differences between banks. The least affected rated banks would be in Kuwait. This is because the regulator already requires banks in Kuwait to set aside a general provision on their performing facilities equivalent to 1 percent of cash facilities and 0.5 percent of non-cash facilities.
The most affected rated banks would be in Qatar, primarily due to the specific cases of a couple of Qatari banks that have either seen a significant deterioration in their asset quality indicators, or an increase in past due but not impaired loans, over the past couple of years. S&P calibrated its assumptions based on rated GCC banks’ balance sheet structures. The same methodology and assumptions might not be applicable to other banks or other jurisdictions.
A closer look at S&P’s estimates shows that of the 27 banks that it rate in the GCC, the impact of IFRS 9 on eight (nine under the alternative scenario) would be neutral. At the same time, the impact on four banks (the same number under the alternative scenario) would be meaningful, meaning that they will have to set aside additional provisions equivalent to more than 50 percent of their net operating income in the year of IFRS 9 adoption. These banks are highly exposed to riskier countries, have asset quality indicators that have deteriorated recently, or are exposed to risky business (primarily SMEs and financing subcontractors). In contrast, banks for which the ratings agency thinks the impact would be limited already have high provisions, or are exposed to less-risky asset classes, such as retail lending.
,Peninsula