By Andy Sambidge
Ratings agency expects to see improving asset quality and falling credit losses for most Gulf banks
Prospects for Gulf-based banks remain healthy for the next few years on the back of the region's strong economic performance, according to a new report by Standard & Poor's.
The ratings agency said regional bank have shown healthy earnings growth over the last 18 months despite historically low interest rates.
The report said banks in Gulf Cooperation Council (GCC) countries have experienced lower net interest margins, but improving asset quality and falling credit losses have generally offset this.
"We believe declining credit losses will continue to support GCC banks' earnings throughout 2014, although we expect this effect to be less visible in 2015," S&P said in the report.
"Prospects for economic growth in the Gulf region remain healthy for the next few years," added Standard & Poor's analyst Timucin Engin.
"We expect most Gulf banks to continue to benefit from robust corporate activity and consumer consumption over the next 18-24 months. The many infrastructure projects planned in the Gulf should translate into sustained streams of corporate lending."
S&P said over the past three years, strong liquidity flows into the Gulf's deposit markets have supported the region's banks which traditionally rely on local deposits for the bulk of their funding, adding that it expects this to continue.
"Regional sovereigns and their affiliated entities are key depositors in the local markets, and their fiscal positions should continue to be bolstered by strong oil prices," said the report.
It added: "We believe the banks in the region are well-positioned to comply with the incoming Basel III rules. Most banks already have significant levels of high-quality capital, as their reported Tier I ratios indicate. In addition, given their strong earnings generation, Gulf banks can boost their capital if needed by minimising dividend payouts.
"Our rating actions in 2014 have largely reflected the generally positive backdrop in the Gulf region, and our rating outlooks largely reflect the ongoing recovery in the GCC banking system. Of our 27 public ratings, seven have positive outlooks, and only three have negative outlooks."