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Sun 29 Oct 2017 10:44 AM

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Capitalisation keeps GCC banks strong, says S&P

Banks in UAE, KSA and Qatar were found to have the strongest capitalisation, with Bahraini banks the weakest

Capitalisation keeps GCC banks strong, says S&P
Rated banks in Saudi Arabia, Qatar and the UAE were found to have the highest capitalisation, with the weakest in Bahrain.

Capitalisation continues to be a positive rating factor for banks throughout the GCC, according to S&P Global Ratings.

S&P calculates an unweighted average ratio of 11.5 percent from Gulf Banks as of October 16, based on their latest tally of risk-adjusted capital (RAC) ratios, based on their year-end financial disclosures and S&P’s own parameters. S&P expects the RAC ratios of Gulf banks to remain stable over the course of the next 12 to 24 months.

"This result underpins our strong or very strong assessments of capital and earnings for 72% of the Gulf banks we rate," said S&P Global Ratings credit analyst Mohamed Damak in the report published Sunday. “Their quality of capital remains strong, even though we have observed higher recourse to hybrid instruments over the past few years."

At the end of 2016, eligible hybrid instruments were fund to represent nine percent of the banks’ total adjusted capital (TAC). Credit risk and exposure to corporates “dominates” S&P’s calculations on their risk-weighted assets.

Additionally, S&P’s adjusted RAC ratio highlights single-name and geographic concentration as additional risk factors, a fact which is reflected in its risk position assessment. The combined impact of S&P’s assessment of capital earnings and risk position is negative or neutral for 60 percent of the Gulf banks rated.

"It is important to mention that the 11.5 percent average RAC ratio as of year-end 2016 masks significant disparities among rated banks, ranging from 5.3 percent to 17.0 perfect," Damak added.

Rated banks in Saudi Arabia, Qatar and the UAE were found to have the highest capitalisation, with the weakest in Bahrain.

Banks in Bahrain and some in Kuwait were weighted down by their exposure to riskier countries such as Turkey and others in the region.

“Compared with local regulatory requirements, our RAC ratios are lower primarily because we apply more conservative risk weights on most asset classes, including sovereign exposures," Damak noted.

The average Tier 1 capital ratio for rated banks, according to local regulatory measures, was at 16.3 percent at year-end 2016.

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