Growing exposure to the Gulf's overheated real estate sector is a growing concern for banks like First Gulf in Abu Dhabi, where funding conditions for financial firms are set to deteriorate, HSBC said.

HSBC cut its price targets on a number of major banks in the emirate, the largest in the United Arab Emirates federation, saying the financial sector would remain challenged by the country's lack of economic diversification.

"The rising concentration of real-estate and construction loans in banks' portfolios is a concern, though we do not see any imminent threats as yet," HSBC said in a note to clients.

HSBC said First Gulf and National Bank of Abu Dhabi were the most exposed to any downturn in the property market.

HSBC cut its investor recommendation on First Gulf to neutral from overweight with a price target of 24.5 dirhams and lowered its price target National Bank of Abu Dhabi to 19.9 dirhams from 22.5 dirhams.

Banks in the Gulf have weakened dramatically in recent weeks, weighing on the region's bourses on concerns that rapid expansion in the real estate market, to which the banks are exposed, may have gone too far.

ADCB has, for example, shed 24 percent so far this year, although FGB has gained around 10 percent. "There is overheating in the region's real-estate market but we do not see any imminent threat to asset quality," the note said.

HSBC also lowered its price target on Union National Bank to 11.0 dirhams from 11.9 dirhams, and its target on Abu Dhabi Commercial Bank to 6.4 dirhams from 7.8 dirhams, according to the note. - Reuters