Qatar banking system’s external debt decline may continue over next two years: S&P

The decline in Qatari banking system’s external debt is expected to continue in the next 12-24 months, S&P Global has said in a report.
GCC countries are back to pre-pandemic levels, S&P said and noted the region’s banks’ margins, cost to income, and cost of risk are all improving.
“We expect cost of risk to stay at normalised levels of about 1% and margins to continue improving although at a slower pace than in 2022,” S&P noted.
GCC banks’ efficiency continues to support profitability, but inflation will increase operating costs. Low cost of labour and limited taxation help, it said.
S&P expects GCC banks’ asset quality indicators to deteriorate only slightly because of slowing growth and higher interest rates. Although banks have absorbed the impact of the pandemic, they also continued to build provisions and write off nonperforming loans (NPLs) to make space for new ones.
Profitability has recovered to pre-pandemic levels in most GCC countries thanks to higher interest rates and stable cost of risk. Although banking sector efficiency remains strong, inflation will increase operating costs.
Lower global liquidity is likely to have a limited impact on GCC banks because of their strong net external asset positions or limited net external debt positions.
Strong capitalisation and potential extraordinary government support, in case of need, continue to support banks’ creditworthiness.
Rating bias remains positive, driven by sovereign and idiosyncratic factors. The Russia-Ukraine conflict has more limited implications for the region and its banks than other Middle Eastern or North African countries, S&P said.
On non-performing loans of GCC banks, S&P said the NPL ratio dropped slightly, thanks to the stronger economic environment, reaching 3.3% of total loans on average for its sample of banks on September 30, 2022, compared with 3.5% at year-end 2021.
“We expect a small deterioration of asset quality indicators because of the expected slowdown of the GCC economies and higher interest rates. In our view, banks have already absorbed the impact of the pandemic and continue to build provisions for difficult times. Overall, we expect the NPL ratio to remain below 5% in the next 12-24 months,” S&P said.
GCC banks' capitalisation levels will continue to support their creditworthiness in 2023 and 2024, it said.
GCC banks stepped up their additional Tier 1 (AT1) issuances (both conventional and Islamic) in the past few years to benefit from supportive market conditions. As interest rates increase, S&P sees lower issuance and potential decisions to not call hybrids approaching their first optional call date.
GCC banks are mainly funded by domestic deposits, which have proved stable through different cycles. Deposit growth was insufficient to finance lending growth in some countries, particularly in Saudi Arabia, where the central bank intervened to alleviate the pressure.