Gulf banks are showing signs of recovery after spending more than $20 billion on provisioning for loans and investments but asset quality is unlikely to improve until 2011, Standard & Poor's said in a report.

Banks in the Gulf Arab region suffered as the global slowdown hit their exposure to the fledgling real estate sector, particularly in Dubai, and from loose lending policies, leading to several lenders booking record provisions in 2009.

'We believe the asset quality of Gulf banks should improve from 2011 and that their good margins and efficiency will provide a solid foundation for their return to high profitability,' said credit analyst Mohamed Damak.

'Improving liquidity, funding future growth, and refinancing the stock of existing debt are the next hurdles facing Gulf banks,' he added.

S&P said that government support and good capitalisation levels of regional banks were positive factors which would help future recovery, but added that its outlook on most lenders in the United Arab Emirates remained negative due to the operating environment. – Reuters