Gulf banks to escape eurozone turmoil, says S&P

Rating agency says banks in region to continue 'steady recovery' during next two years
Gulf banks to escape eurozone turmoil, says S&P
S&P says Gulf banks will remain isolated from the eurozone turmoil this year and next. (AFP/Getty Images)
By Andy Sambidge
Fri 06 Jul 2012 09:39 AM

Gulf banks are likely to continue their steady recovery from the 2008 crisis and remain isolated from eurozone turmoil for the rest of 2012 and 2013, according to a new report by Standard and Poor's.

The rating agency said that despite slower balance sheet growth, most GCC banks have maintained healthy earnings generation before provisioning.

"We believe the trend of declining loan loss provisions will continue for most of the banks in the Gulf Cooperation Council, resulting in further recovery in reported net profits despite adverse conditions in the eurozone and international banking markets," said Standard & Poor's credit analyst Timucin Engin.

S&P said even though pockets of risk persist, asset quality continues to improve, and as a result banks do not need to set aside as many provisions to cover their loan losses.

This trend of better asset quality and lower loan loss provisions is fueling the improvement in earnings at most Gulf banks.

"We don't expect the eurozone turmoil to have a big direct impact on the GCC banks because their net funding dependence on European banks, and external funding in general, is largely limited and manageable, in our view," Engin added.

Standard & Poor's credit analyst Paul-Henri Pruvost added: "GCC banks' lending and investment exposures to the eurozone are also very limited and their high levels of capital are also a major strength, and provide an important cushion against unforeseen stress on asset quality."

S&P said in the report that apart from Bahrain, other GCC members have remained largely insulated from the spillover effects of the political turmoil in other parts of the Middle East and North Africa.

The outlook for lending growth in Kuwait and the UAE remained limited, S&P said, but was healthy for Saudi Arabia, Qatar, and Oman.

For most GCC banks, funding profiles have improved visibly in the past few years on the back of declining balance sheet growth, S&P added.

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