GCC banking risk assessment raised
Manama, August 7, 2008
Standard & Poor’s Ratings Services has raised its banking industry country risk assessment on Bahrain, Saudi Arabia, Qatar and Oman.
GCC banking sectors show a fairly high level of concentration, and competition is relatively limited except in Bahrain and the UAE, the report said.
Saudi banks have by far the largest customer franchises and distribution networks.
Regional integration remains limited, it said.
Increasing foreign competition is unlikely to dramatically weaken banks’ franchises due to the protected nature of most Gulf markets, especially for retail banking where branch networks are needed, it said.
Over time, GCC banks have built up their capital and earnings capacity to the point where they have the strongest financial profiles in the world from a quantitative perspective.
Broadly speaking, GCC banks are poised to defend their competitive positions well and maintain their financial strength over the medium term, the report adds.
’While banking opportunities are increasing in parallel with oil prices, this also means that new sources of risk have emerged, notably from the rapid growth of loan portfolios that remain un-tested by an economic downturn and the overheating real estate sector, especially in Dubai,’ said S&P’s credit analyst Emmanuel Volland.
Gulf banks’ appetite for mergers and acquisitions outside their own turf, mainly in the Middle Eastern and North African countries is growing.
The agency also affirmed its estimate of the incidence of gross problematic assets in the financial systems of the six GCC countries in an economic recession at 15pc to 30pc in its latest report on the GCC.
These actions in themselves will not automatically lead to upgrades of Gulf banks, but could contribute to case-by-case changes in the ratings.
’These actions primarily reflect an improved industry risk profile in Saudi Arabia, Qatar, Oman, and Bahrain that, combined with strong economic growth, have a positive effect on their banking systems,’ said Volland.
Although this strategy is helping GCC banks diversify geographically, it could prove costly if the banks do not control the associated execution and integration risks or if above-average credit risks in these countries materialise.
Supportive and wealthy shareholders, including governments, with ready capital are a strong mitigating factor to these risks.
While the economic environment has been supportive of Gulf banks, GCC economies remain skewed toward the oil and gas industry.
Like many other markets, inflation has accelerated, pushing up salaries.
In contrast with the tightness in global markets, liquidity in the GCC remains high, although US dollar-denominated funding has dried up due to some speculation on the depegging of local currencies.
S&P’s classifies the six GCC countries as interventionist toward their banking systems.
’We believe that the GCC governments would be highly likely to intervene and provide extraordinary support to state banks and systemically important private sector banks in difficulty,’ the report said. - TradeArabia News Service