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Wed 21 Sep 2016 03:04 PM

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Gulf banks to remain 'under pressure' until end-2017

S&P warns low oil prices, geopolitical risk mean weakening financial performance to continue

Gulf banks to remain 'under pressure' until end-2017

Banks in emerging markets of the Gulf Cooperation Council (GCC) countries, Nigeria, Russia, South Africa, and Turkey will remain under pressure for the remainder of 2016 and 2017, a report from S&P has claimed.

The ratings agency said that it expected a trend of weakening financial performance to continue, sparked by low commodity prices and geopolitical risks.

"The operating environments in these emerging banking markets are suffering the effects of low commodity prices on economic growth and investment activity, still significant political and geopolitical risks, and weakening local currencies outside the Gulf Cooperation Council (GCC)," said S&P Global ratings analyst Mohamed Damak.

However, the firm also said that it had seen some foreign investors return to emerging markets given low interest rates.

“We think that two important factors could influence the overall performance of banks in countries in our study,” the report stated.

“On the downside would be an unexpected additional drop in commodities prices or materialisation of idiosyncratic risks such as political risks or lack of economic reforms.

“On the upside, however, a continuation of the recovery in capital inflows that we've observed over the past few months could ease the liquidity pressure in some of these markets.”

The agency said that GCC and South African banks were least vulnerable to a risk of default, while Nigerian and small Russian banks had the greatest risk.

The report follows a recent study published earlier this month, which said that more than a third of Arab banks have seen their business links with foreign banks shrink over the past four years because of pressures such as economic sanctions and concern about money laundering.

"The inability of banks in some Arab countries to enter into correspondent relationships with foreign banks could have a deleterious impact on trade and remittances and ultimately on real economic activity," the Arab Monetary Fund said in the study.

"Consequently, this is an increasingly important challenge facing Arab countries."

Senior officials in the Gulf, including the central bank governors of the United Arab Emirates and Bahrain, have publicly complained in the past year about the reluctance of international, particularly US, banks to deal with some of their Arab counterparts.

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