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Under new International Financial Reporting Standards (IFRS) 9, all GCC banks compliant with the standards are required to break down investment portfolios into pre-defined stages. Accordingly, Stage 2 – referred to as underperforming, where credit risk has increased significantly since initial recognition – warns stakeholders to account for expected credit losses, especially since the classification could lead to business troubles later on. The next stage, Stage 3, is when a loan’s credit risk increases to the point that a loan is credit impaired, leading to possible deterioration of asset value.
Currently, the impact of IFRS 9 implementation has been “manageable” according to S&P Global’s most recent report. In its examination of the effects of the roll out of the new standards in the year since implementation, the ratings agency warned that the next 12-24 months could potentially have adverse effects on the asset quality of GCC banks if necessary steps are not taken. Loan impairments are likely to go up, which could result in asset value deterioration in the GCC. This makes it critical for banks to have access to transparent and accurate market data to correctly ascertain markers like Loan-to-Value (LTV) ratios and calculate risk to mitigate adverse outcomes.
Since 2015, Property Monitor has been a key strategic partner to leading banks and lending institutions in the UAE, providing real-time transparent, accurate data and tools specifically designed to deliver a complete view of market values to help identify relevant risk areas. By assessing underlying asset values and market trends correctly before loans are approved, lenders can identify mortgages with high probabilities of over-valuation when underwriting procedures begin. Maintaining current property value ranges and calculating Loan-to-Value (LTV) ratios to match market prices is particularly important, as it enables regular assessments of loan book values to mitigate any future losses.
According to S&P’s report, deterioration of asset value could particularly affect the UAE and Saudi Arabia. In the UAE the concentration of loans is relatively high – about AED 300 billion in real estate, according to a report in Gulf News, which accounts for approximately 20% of total loans – indicating that risks associated with real estate valuations and loan impairments could be expected over the next 12-24 months.
With continued downward pressure on the market, asset and credit quality could well be affected. Using data like that provided by Property Monitor to correctly assess and calculate LTV ratios and risks will be of critical importance as IFRS9 guidelines are implemented across the UAE and the wider GCC.
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