GCC Islamic Banks Stay On Course Through Glum Operating Conditions, Says S&P Global Ratings Report

•    We think GCC Islamic banks' financial profiles will continue to falter in 2017-2018. 
•    We foresee weaker growth prospects, higher cost of risk, and lower liquidity for GCC Islamic banks. 
•    Still, most of these banks have built sufficient capital buffers to weather the sluggish operating environment.

DUBAI (S&P Global Ratings) April 19, 2017--The weak economic environment will continue to dampen the financial performance of Islamic banks in Gulf Cooperation Council countries in 2017 and 2018, said S&P Global Ratings in a report published today, "GCC Islamic Banks Stay On Course Through Glum Operating Conditions." 

The end of the commodities super-cycle has sparked a fall in the economic growth and prospects of the Gulf Cooperation Council region, implying both lower growth opportunities and deteriorating liquidity for its conventional and Islamic banking systems. 
 
"We foresee further declines in GCC banks' asset quality and profitability indicators in 2017-2018," said S&P Global Ratings Head of Islamic Finance Dr. Mohamed Damak. "Still, we think that the banks have built sufficient buffers to make the overall impact on their financial profiles manageable."
 
By global and regional standards, the Islamic banks in our sample continued to display strong asset quality indicators, profitability, and capitalization in 2016. We think that the current environment is creating an opportunity for the local regulators to start inching toward a more stringent application of Islamic finance's profit and loss sharing principle.

We have seen a few attempts in the industry to move in this direction, through the issuance of Tier 1 and Tier 2 sukuk with loss absorption at the point of nonviability (generally defined as a breach of the local regulatory capital ratios). We expect such issuance will continue, albeit slowly, over the next two years.