Gulf banks to weather global storm

WEATHER STORM: Banks in the Gulf will continue their strong performance, S$P said. (Getty Images)

Banks in the Gulf are set to continue performing strongly despite the current global market turmoil, Standard & Poor's (S&P) said on Wednesday.

The ratings agency said in a report that the region's booming economies and banks' limited exposure to the US subprime mortgage crisis would continue to spur growth in the sector.

"Gulf banks are benefiting from the rosy environment in their home markets and carry limited exposure to US subprime and structured investment products," said Standard & Poor's credit analyst Mohamed Damak.

"As a result, business volumes are expanding, provisioning needs are minimal, and capital and commitment are forthcoming from deep-pocketed shareholders."

S&P said it expected banks' ratings to rise as a result of the Gulf's buoyant economic environment.

It also expected more banks to seek ratings as lenders look to capital markets for long-term funding.

Fears had emerged that the region could been left exposed to the subprime crisis that has been weighing on Western financial institutions after Gulf banks were forced to writedown an additional $1.5 billion in mortgage-related losses earlier this month.

Gulf International Bank (GIB) was the worst hit of the GCC-controlled banks and was forced to take $1 billion in provisions, while Arab Banking Corporation and Kuwait’s Gulf Investment Corporation were also forced to take additional provisions of $230 million and $246 million respectively to cover subprime-related losses.

According to S&P, Gulf banks do run risks associated with carrying a large amount of young loans that are yet to be tested by “economic dislocations, including fast-growing exposures to the region's real estate sector”.

The ratings agency also noted that increased merger and acquisition (M&A) outside the Gulf could also leave banks exposed to additional risk if not managed properly.

“Although this strategy is helping banks diversify geographically, it could prove costly if the associated execution and integration risks are not controlled or if above-average credit risks in these countries materialise,” S&P said.

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