IFRS 9 adoption to drive higher provisions for Saudi banks

The implementation of the International Financial Reporting Standard (IFRS) 9 is likely to drive higher provisions for Saudi banks in the near-term, with lenders set to exercise greater caution to avoid future volatility of net income, analysts told Argaam.

As of Jan. 1, 2018, Saudi-based banks began to apply the IFRS 9 accounting standard, under which provisions are to be set aside for credit impairment on anticipation of customer default, not when actual default happens. IFRS 9 has a direct impact on banks' solvency positions and shareholders' equity.

Since the start of the year, many lenders in the Kingdom have reported impact on retained earnings, and consequently on shareholders’ equity, for IFRS9-related adjustments to expected credit losses, said Muhammad Faisal Potrik, head of research at Riyad Capital.

“We believe provisioning generally is likely to be stricter in the IFRS regime for banks, which could mean higher provisions this year and beyond than would otherwise be the case,” he told Argaam.

Audit consultancy KPMG also expects Saudi banks to see rising provisions this year in an IFRS9 environment, it said in a recent report.

Accounting for IFRS 9 expected credit losses (ECL) is expected to increase credit loss provisions in the industry on average by 10-45 percent.

Adoption of the standard will also impact banks in terms of how they assess risk appetite, pricing, credit sanctioning and credit stewardship of their businesses, the consultancy noted.

Many major Saudi banks reported declines in shareholders’ equity in the first quarter: Riyad Bank reported a SAR 2.12 billion drop, Al Rajhi Bank saw a SAR 2.88 billion decline, while Samba Financial Group announced a SAR 2.52 billion reduction earlier this month.

Other lenders that have disclosed decreases in shareholders’ equity include Alawwal Bank, Alinma Bank, Saudi British Bank, Arab National Bank, Bank Aljazira, and Saudi Investment Bank.

According to a report on Tuesday by S&P Global Ratings, the average additional provision for banks in Saudi Arabia since IFRS9 implementation was slightly higher than initially expected.

“In Saudi Arabia, the more conservative stance of some banks and the country's still muted economic performance led to higher average additional provisions in the banking sector. The difficulties experienced by contractors and the real estate sector, generally, since oil prices fell is a key contributing factor,” the note said.

In S&P’s view, some lenders in the Kingdom have become more cautious in a bid to avoid future volatility of net income caused by the first impact of IFRS 9 on shareholders' equity.

Meanwhile, Moody’s Investors Service said the standard will have a “very modest” impact on Saudi banks’ regulatory capital ratios, given that the Kingdom’s central bank SAMA has allowed them to amortize the additional provisioning requirement over the next five years.

“As per our initial assumptions, the average impact of IFRS 9 on Saudi banks’ total solvency ratio will be below 100 basis points, resulting in less than 20 basis points annual impact over the next five years,” said Olivier Panis, vice-president and senior credit officer at Moody’s.

“In turn, the banks will improve materially their level of loan loss reserves, which is positive considering the increasing trend of non-performing loans in Saudi Arabia,” he told Argaam.

In light of the “very high” level of provisioning reported by Saudi banks for the first quarter of 2018, after transition to IFRS 9, Moody’s said it does not expect any material increase in banks’ impairment charge in their P&L accounts for the rest of the year.

Write to Jerusha Sequeira at jerusha.s@argaamnews.com