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ANALYSIS

Economic growth, capitalisation ‘driving Gulf banks’

Dubai, March 24, 2013

Gulf banks will likely continue their steady recovery from the global financial crisis this year, aided by healthy economic growth in the GCC and still high oil prices, said a new report released by Standard & Poor’s (S&P).

“Our forecast for average 4.6 per cent GDP growth in the GCC for 2013 should keep demand for bank credit high and expand banks' earnings,” added the S&P’s Ratings Services report: A Growing Economy And Strong Capitalization Keeps Gulf Banks On A Path To Recovery.

"We believe strong bank lending on the back of corporate and infrastructure growth will help expand revenues of banks in Saudi Arabia, and Qatar," said Standard & Poor's credit analyst Timucin Engin. “Specifically, we expect average lending growth to remain above 10 per cent level for Saudi Arabia."

In Kuwait, the UAE and Bahrain, however, which have seen a less pronounced rebound in growth, we envisage a slower pick-up in lending. Yet, loan losses are gradually declining at banks in these countries because they cleaned up their balance sheets between 2008 and 2012. This should continue to foster a recovery in profitability in the region, albeit at a slower pace than in recent quarters, according to the report.

Despite some differences between individual countries, we expect Gulf banks' interest margins and cost-to-income ratios will remain stable over the coming quarters, and that credit losses will continue to fall, although at a slower pace than in previous years, said Engin.

This should ultimately translate into healthy profit growth for Gulf banks, he added.  

The banks are also likely to use their strong capitalization to continue to strengthen their market positions internationally, the report said.

Gulf banks have an average unweighted risk-adjusted capital (RAC), according to Standard & Poor's framework, of about 12 per cent-13 per cent as of Dec. 31, 2012--about five percentage points higher than the unweighted average 6.9 per cent for the 100 largest banks Standard & Poor's rates, based on data ranging from year-end 2011 to June 30, 2012.

As European banks are shedding assets in the Mena region to shore up their balance sheets in the aftermath of the financial and sovereign crises, well-off Gulf banks in GCC are taking their place, the report noted.

In 2012, we saw a sharp rebound in acquisitions by some of the larger Gulf banks, especially in Turkey and Egypt, taking advantage of prices that were significantly lower than before the crisis. We expect the trend to continue this year, said Engin.

The banks are also capitalizing on appetite in regional and international debt capital markets for long-term debt issuances at attractive prices, amid historically low interest rates and healthy investor demand.

According to data compiled from external sources, issuances reached $15.3 billion, representing 171 per cent growth relative to 2011. The bulk of these were in the form of five-year bonds and sukuk (Islamic financial certificates). S&P expects that the banks will continue to tap debt capital markets this year to benefit from currently accommodative pricing conditions.

"We see some downside risks for banks, not least from the region's dependence on oil prices and structural political risks, particularly stemming from Iran," said Engin.

"However, we think favourable economic conditions and the banks' sound capital and funding positions will outweigh these risks. For this reason, the outlook is stable on 23 of the 26 banks we rate in this region and we expect the ratings will stay broadly stable through 2013,” he concluded.

Standard & Poor's Ratings Services, part of The McGraw-Hill Companies, is a leading provider of independent credit risk research and benchmarks. – TradeArabia News Service




Tags: Standard & Poor’s | S&P | Gulf Banks | Report | Economic Growth | Capitalisation |

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