Capitalization continues to be a positive rating factor for banks in the Gulf Cooperation Council (GCC) countries, S&P Global Ratings said in a new report.

“After completing our latest tally of their risk-adjusted capital (RAC) ratios, based on their year-end 2016 financial disclosures and our own parameters as of October 16, 2017, we calculate an unweighted average ratio of 11.5 per cent for the Gulf banks. Looking ahead, we expect their RAC ratios to remain relatively stable in the next 12-24 months,” said S&P Global Ratings credit analyst Mohamed Damak in the report titled "Capitalization At Gulf Banks Is One Of The Main Strengths Supporting Their Ratings."

"This result underpins our strong or very strong assessments of capital and earnings for 72 per cent of the Gulf banks we rate. Their quality of capital remains strong, even though we have observed higher recourse to hybrid instruments over the past few years,” he added.

“At year-end 2016, eligible hybrid instruments represented on average 9 per cent of the banks' total adjusted capital (TAC), our base measure of capital. Credit risk and particularly exposure to corporates dominates our calculation of their risk-weighted assets. Finally, our adjusted RAC ratio highlights single-name and geographic concentration as additional risk factors. We've reflected these in our risk position assessment and they explain why the combined impact of our assessment of capital and earnings and risk position is negative or neutral for 60 per cent of the Gulf banks we rate.

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

“Rated banks based in the United Arab Emirates, Saudi Arabia, and Qatar enjoy the highest capitalization while the weakest capitalization, but still adequate, is for rated Bahraini banks. The average capitalization for Bahraini banks and some Kuwaiti banks is weighed down by their exposures to riskier countries such as Turkey and others in the Middle East.

“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. The average Tier 1 capital ratio for rated banks according to local regulatory measures reached 16.3 per cent at year-end 2016,” Damak concluded. – TradeArabia News Service