S&P Global Ratings

Saudi Arabian issuers boost #sukuk in first five months of 2019

According to S&P Global Ratings, the sukuk market enjoyed a strong start to the year but it may not last. S&P Global Ratings Head of Islamic Finance, Mohamed Damak said high levels of liquidity in Indonesia, Turkey's efforts to tap all available financing sources, and the return of Qatari and Saudi Arabian issuers to the market have boosted issuance of sukuk 17.6% in the first five months of 2019. S&P expects the total Sukuk issuance will average $105 billion-$115 billion this year, assuming the Brent oil price stabilizes at $55 per barrel. This follows a mild performance in 2018 when issuance dropped to $114.8 billion, a 5% decline compared with 2017; US dollar Sukuk alone fell by 15% year on year. Tightening liquidity conditions, high geopolitical risks in the Middle East, and challenges inherent to sukuk issuance will likely dampen sukuk market performance in 2019.

Global #sukuk market to hit $2.7trln by 2030: Franklin Templeton

According to investment management firm Franklin Templeton, the global sukuk market is set to grow at a compound annual rate of around 15% to reach $2.7 trillion by 2030. Global sukuk issuance stood at over $477 billion at the end of last year, but has slowed somewhat in recent years. Ratings agency S&P in January described sukuk issuance as 'mild' in 2018, as the total amount of sukuk issued dropped by 5% to $114.8 billion. It forecast issuance of $105 billion-$115 billion for 2019. Mohieddine Kronfol, head of fixed income at Franklin Templeton, forecasts that the growth continues at a relatively rapid pace. In GCC markets several corporate entities have been issuing debut sukuk in recent months. Saudi Telecommunications Company issued its debut $1.25 billion sukuk on Sunday, following on from Saudi food company Almarai’s first $500 million sukuk in February.

S&P: GCC Islamic Banks to Show Resilience in 2019,2020

According to S&P Global Ratings, Islamic banks of the Gulf Cooperation Council (GCC) are expected to show resilience over the next two years after weathering tough market conditions in 2018. Last year they expanded slower than conventional peers for the first time in five years. The growth forecast for Islamic banks for 2019-2020 is the same as what the rating agency is estimating for conventional lenders in the region. S&P Head of Islamic Finance Mohamed Damak forecasts a muted GCC economic growth over this period, despite some benefit from government spending and strategic initiatives such as national transformation plans and Dubai Expo 2020. However, with the transition to IFRS9/FAS 30, Islamic and conventional banks will even more closely align. Another trend is the significant increase in Islamic banks’ coverage ratios at end-2018, coupled with a stable cost of risk that is lower than conventional banks.

Islamic #Insurance sector to stay profitable in ’18

The net income of listed companies in the GCC Islamic insurance sector has nearly halved in 2017 to $375m, from $674m in 2016. The decline in 2017 net income was mainly driven by weaker results in the Saudi Arabian insurance sector. S&P Global Ratings believes that medium-term growth prospects in the sector remain satisfactory given relatively low penetration levels. It expects Islamic insurance to remain profitable overall in 2018. The ratings agency also observes strengthening capital levels. The Islamic insurance industry in GCC countries outside Saudi Arabia recorded an increase in net income by about 832% to $82m in 2017 from$9m in 2016. Also, there was an increase of more than 60% in first-quarter 2018 compared with the same period last year. This improvement was mainly driven by better results in the UAE.

Islamic banks’ financial profile to stabilise in ’18

According to S&P Global Ratings, the GCC Islamic banks’ financing growth will reach 4-5% in 2018-19, supported by strategic initiatives by the regional governments. Powered by Qatar FIFA World Cup, Dubai Expo 2020 and Saudi Vision 2030, and higher government spending in Kuwait led by Kuwait 2035 Vision, the region’s Islamic banks will continue to expand. Asset growth should remain in the low single digits due to slow economic growth, unless oil prices rebound significantly. However, Islamic banks’ cost of risk will increase due to the adoption of International Financial Reporting Standards (IFRS) 9 and Financial Accounting Standards (FAS) 30. While the volume of sukuk issuance increased in 2017 thanks to jumbo issuances by some GCC countries, issuance volume is currently uncertain for 2018.

GCC Islamic Banks' Financial Profiles to Stabilize in 2018

According to S&P Global Ratings, Islamic banks in the Gulf Cooperation Council (GCC) countries should see their financial profiles stabilize through 2018. S&P's Global Head of Islamic Finance, Mohamed Damak expects that GCC Islamic banks' total asset growth will remain in the low single digits over the next 12-24 months, after stabilizing at about 4% for the GCC system in 2017. He also expects that cost of risk for Islamic banks will rise, due to the adoption of International Financial Reporting Standard 9 and Financial Accounting Standard 30. Combined with the introduction of value-added tax, the increase in risk costs will result in a dip in the profitability of Islamic banks in the next two years.

Islamic bonds face 'uncertain and muted' 2018 amid central bank tightening and geopolitics

According to S&P Global Ratings, the outlook for 2018 is uncertain because of geopolitical risks and economic uncertainties. Sukuk issuance was strong last year with $97.9 billion, up 45.3% from the $67.4 billion issued in 2016. So-called "jumbo issuances" were seen in Saudi Arabia and other Gulf Cooperation Council (GCC) economies in 2017. Mohamed Damak, senior director at S&P Global Ratings, said the first two months of 2018 had been marked by a good performance for local currency issuance and a drop in foreign currency issuance. He added that 2018, as a whole, was expected to see a drop in sukuk issuance, with expectations for around $70-80 billion in total. There are a number of reasons for this, including central bank tightening, lower financing needs of GCC banks and geopolitical risks. Another reason for lower sukuk performance could be the slow progression of the standardization in the sukuk market.

Opinion: Global #sukuk market unlikely to repeat 2017 performance

In 2017 the exceptional performance of sukuk was driven by good liquidity conditions, alongside certain countries’ desire to develop their Islamic finance industries. However, the outlook for sukuk in 2018 is more uncertain. According to Mohamed Damak, S&P Global Ratings’ Head of Islamic Finance, tighter global liquidity conditions, mounting geopolitical risks and slow progress on the standardisation of Islamic finance products will continue to hold the market back from its full potential. While sukuk issuance may decrease in 2018, there are a couple of interesting trends. These include the more stringent application of the profit-and-loss-sharing principle supported by several Sharia scholars. The sukuk investor base is broadening, but there is a lack of a specific regulatory framework to protect retail investors.
Dubai Islamic Bank (DIB) has successfully issued a $1bn sukuk with a five-year tenor. It is the first US dollar benchmark sukuk transaction from the GCC in 2018. The issuance emanates from DIB’s $5bn sukuk programme and carries a profit rate of 3.625%. The instrument will carry a dual listing on the Irish Stock Exchange and Nasdaq Dubai.

S&P report discusses whether #Fintech could disrupt GCC banks' business models

S&P Global Ratings believes that financial technology could reduce the profitability of some business lines of Gulf Cooperation Council (GCC) banks. S&P's credit analyst Mohamed Damak said fintech could impinge on retail banking, particularly money transfer and foreign-currency exchange. This would push some banks to adjust their operations through increased digitalization, branch network reduction, and staff rationalization. He added that fintech alone is not expected to have a significant influence on GCC banks ratings in the next two years. He believes that banks will be able to adapt to the changing operating environment through collaboration with fintech companies and cost-reduction measures. Furthermore, regulators in the GCC will continue to protect the financial stability of their banking systems. Fintech is not yet a negative rating driver. However, it will increasingly become a force to be reckoned with.

S&P Global Ratings: Global issuance of #sukuk to moderate in 2018 as Islamic finance moves into slower growth

S&P Global Ratings highlighted global issuance of sukuk in the first half of 2017 was good, but expects it to moderate in 2018. S&P head of Islamic finance Mohamed Damak said 2018 was less certain, as the large issuances of last year are not expected to repeat. Among some of the downside trends relating to Islamic finance includes subdued economic performance in Islamic finance core countries, primarily due to low oil prices. The long-standing debate about standardisation will continue to hinder the industry. S&P's report is entitled "Islamic Finance 2018: Slow Growth Is The New Normal" and the rating agency expects the industry to lose momentum in 2018. The contribution of Islamic finance has so far been limited by the industry's relatively small size and structure.

Islamic finance growth to lose momentum in 2018: S&P report

According to S&P Global Ratings, the Islamic finance industry will continue to expand this year, but will lose some momentum in 2018. Even though sukuk issuance accelerated in the first half of this year and will likely stay strong in the second half, S&P Global Ratings believes this growth rate is not sustainable. In their view, the current economic situation in core Islamic finance markets and depreciation of local currencies have weighed on the industry’s performance in 2016 and 2017. The report foresees a deterioration of GCC Islamic banks’ profitability in 2017 and 2018 as the cost of funding has increased and the cost of risk is on the rise. Sharia is still interpreted in different ways across the various Islamic finance markets. However, the industry appears to be going in the right direction with the proposal for central Shariah boards.

#GCC governments seek to diversify funding with Islamic #bonds

According to S&P Global Ratings, GCC sukuk issuances jumped 37.7% in the first half of 2017 as governments are seeking to plug deficits amid low oil prices. The rating agency added that issuances of sukuk will not grow at the same rate in the next couple of years, with hurdles such as a lack of standardisation of sukuk rules deterring sales. Mohamed Damak, primary credit analyst at S&P, said the volume of sukuk issuance is expected to remain strong in 2017, but this is likely to be the exception rather than a new norm. 2016 was a record year for regional bond issues in the GCC region, with over $60bn worth of fixed income sold. Last year Saudi Arabia sold $17.5bn worth of bonds in its first international sale and Qatar sold $9bn. Despite the record value of issuances, S&P said that a big funding gap remains. It is estimated at $275bn and about half of that gap is expected to be raised through bonds and sukuk.

Global #Sukuk Market Outlook: the surge in Sukuk issuance isn't the new normal

The Sukuk market performed strongly in the first half of 2017 as issuance increased by 37.7% in the first six months of the year. This was primarily driven by the jumbo local and foreign currency issuances by some GCC governments. Sovereign issuers turned to Sukuk because wanted to diversify their investor base and to benefit from the good liquidity conditions in local and global financial markets. S&P Global Ratings expects the volume of Sukuk issuance to remain strong in 2017, but this is likely to be the exception rather than a new norm. In their view, the large transactions in the first half of 2017 are unlikely to be repeated in 2018. It remains to be seen if the recent developments in Qatar will impact issuance out of the country. Qatar was placed under sanctions by a group of governments that cut diplomatic ties and trade and transport links.

#GCC #insurers’ gross premiums set to grow despite slowing economies

The insurance sector across the GCC is expected to report growth in gross premiums on continued growth in infrastructure investment and favourable regulatory changes. S&P Global Ratings analyst Emir Mujkic said gross premiums will increase in 2017 by around 30% in Kuwait, and by up to 10% in the other three markets. GDP growth will range between 1.5% for Kuwait and about 3.5% for Qatar. The Saudi Arabian Monetary Authority (SAMA) is expected to support the efforts of the traffic police to ensure drivers of illegally uninsured vehicles to buy motor coverage. There are currently 2.5 million Saudi nationals working in the private sector that are not covered by their employers’ group medical schemes.During 2017, the authorities will seek to prompt private employers to provide medical cover for all their staff.

Lower liquidity not driving drop in #GCC #sukuk volumes

According to S&P Global Ratings, the lower liquidity level in the GCC is not the main reason for a drop in the region’s sukuk issuances in recent years. The volume of sukuk was muted last year, particularly compared with conventional bond issuance in GCC countries. S&P believes the complexity of structuring sukuk is the main reason behind muted sukuk issuance in 2016 and it will continue to weigh on volumes in 2017. S&P also estimates GCC sovereigns financing needs at around $275bn over the next three years, the majority of which pertains to Saudi Arabia. While sukuk comprise only a small amount of total outstanding issuance, various governments established the necessary legal frameworks for their issuance.

#Sukuk ‘too complex’ as tool to raise funds

Sukuk issuance growth in the Arabian Gulf is likely to remain subdued this year even as ­countries in the region need to raise more debt to plug budget deficits. According to the latest research from S&P Global Ratings, the reason lies in the complexity of selling Sharia-compliant bonds. S&P's analyst Mohamed Damak said sales of Islamic bonds fell in 2015 and 2016 in the GCC as the issuance of conventional bonds soared. Globally, the market for sukuk is also expected to remain stable this year at between US$60 billion and $65bn. Despite the recent rebound in oil prices, the GCC will need about $275bn of financing between this year and 2019, of which half is expected to come from bonds and sukuk. Complexity of sukuk issuance is not the only headwind facing Islamic financing. According to S&P, rising interest rates in the US will also dampen appetite for sukuk this year.

Global #sukuk issuance likely to hit $65bn this year: S&P

According to S&P's latest report, the global sukuk market is expected to remain fairly quiet in 2017, with total issuance reaching around $60bn -$65bn. The relatively subdued sukuk market anticipated for this year is mainly due to reasons related to complexity of sukuk issuance. S&P Global Ratings’ Global Head of Islamic Finance Dr Mohamed Damak said returning issuers, new entrants, and regulatory developments can stimulate issuance activity, but more likely in the medium term. S&P anticipates some GCC countries might take the Islamic finance route alongside a conventional one. Bahrain will most likely remain a prominent player after issuing $3.2bn of sukuk in 2016. Other GCC members will probably tap the market in 2017. The buyers of sukuk are not only in the GCC or Malaysia, but come from a broad range of investors, including conventional financiers in developed markets. More importantly, there is reportedly a large gap between sukuk issuance and demand.

Global #sukuk market to remain subdued this year: S&P

According to Standard & Poor’s (S&P), global sukuk issuance fell short of market expectations last year, although it was higher than in 2015. The sukuk market will remain subdued in 2017, since the issuance process is still quite complex. S&P Global Ratings' Global Head of Islamic Finance Dr. Mohamed Damak said the sukuk market did not play a countercyclical role in core Islamic finance markets in 2016 and a stabilisation of total issuance in 2017 is forecasted at around $60 billion-$65 billion. Standard & Poor’s do not foresee a substantial increase in sukuk issuance in the GCC this year. The rating agency thinks that some member countries might take the Islamic finance route alongside a conventional one. Bahrain will most likely remain a prominent player after issuing $3.2 billion of sukuk in 2016. Other GCC members will probably tap the market in 2017.

S&P's Not Yet Ready to Upgrade #Indonesia's #Rating from Junk

S&P Global Ratings may not be ready to upgrade Indonesia’s credit rating from junk, concerned by rising bad debts and risks to the growth outlook. Indonesia failed in June to win an upgrade from S&P, which rates the nation’s debt at BB+ with a positive outlook. S&P said at the time that while the country’s fiscal framework had improved, it still faced challenges on its budget performance. Josua Pardede, an economist at PT Bank Permata in Jakarta, said Indonesia still faces fiscal risks. He estimated the tax shortfall for this year will be more than 200 trillion rupiah ($15 billion), causing the budget deficit to widen to around 2.7% of gross domestic product. The government has a deficit cap of 3% of GDP. The ratings company will meet with Indonesian Finance Minister Sri Mulyani Indrawati within the next few weeks before it makes its next assessment due in December. S&P is the last of the three main credit-rating companies to keep Indonesia on junk status.

Oil’s Tepid Rally Just Right for Islamic Debt Market Rebound

Oil’s rally from a 12-year low has gone far enough to revive demand for Islamic bonds, but not so far that frequent issuers aren’t still in need of funds. Stimulus efforts in oil-producing nations helped drive sales of Islamic bonds up 34% to $37.5 billion in 2016, after dropping to a five-year low in 2015. A two-year slump in energy markets has compelled governments in Malaysia and the Middle East to boost debt sales to finance projects built in partnership with private companies. S&P Global Ratings estimates that weak energy prices will leave Gulf Cooperation Council countries with $560 billion of funding needs from 2015 through 2019. According to Apostolos Bantis, head of credit research at Commerzbank AG in Dubai, GCC sukuk activity will rise next year and there will be some first-time issuers.

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