The ongoing standoff between Qatar and a group of Arab states is the biggest geopolitical risk facing banks in the Gulf Cooperation Council area in 2018, according to Mohamed Damak, global head of Islamic finance at S&P Global Ratings.
"Qatar is the most prominent risk for the time being. It's very difficult to have a clear view on if, and when, the issue will be resolved. But our base-case scenario is that it will not intensify," he said at a March 6 media briefing. "However, any surge in geopolitical risk would have an impact on asset quality and growth prospects at GCC banks."
Saudi Arabia, the United Arab Emirates, Bahrain and Egypt all cut diplomatic ties and trade relations with Qatar in June 2017 because of the country's relationship with Iran and its alleged sponsorship of terrorism. S&P Global Ratings said in February that Qatari banks saw $22 billion of outflows between June 2017 and the end of the year.
The other geopolitical risks facing GCC banks are political instability in Iran and Saudi Arabia, he added.
Banks in the GCC will benefit from from a "gradual rebound" in economic activity in 2018, with average GDP growth of 2% to 3% expected. The sector will also be helped by stronger oil prices, with S&P Global Ratings anticipating Brent crude to stabilize at $60 per barrel in 2018, and $55 in 2019, following a long period of depressed oil prices.
But demand from borrowers is expected to be muted, with loan growth expected to be in the "low single digits" in 2018, Damak said. This means that banks' profitability is likely to come under pressure in the coming year, he added.
However, construction is one area where banks may see higher demand for loans, Damak said.
"In Kuwait, for example, we think there will be an uptick in demand for lending because of state-sponsored [building] projects," he said.
There may be some additional demand in Qatar because of ongoing preparations for the 2022 FIFA World Cup, and in Dubai as it prepares for Expo 2020, a major international trade fair.
The average credit quality of banks in the GCC covered by S&P Global Ratings is BBB+, while 68% of GCC banks have a stable outlook, 4% are positive and 28% negative.
"Most of the negative outlooks would be for banks in Qatar," Damak said.
S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.
