Global Arab Network | Creditworthiness Of Gulf Banks Is Likely To Weaken In 2009

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Creditworthiness Of Gulf Banks Is Likely To Weaken In 2009

Global Arab Network - - Adam Turner

Wednesday, 29 April 2009 14:24

The credit profile of Gulf banks will likely deteriorate this year, notably because of the tougher operating environment, lower business volumes, tighter liquidity, and the region's stock market slump since the end of third-quarter 2008, said Standard & Poor's Ratings Services in a report published today.

"We believe that as a result, asset quality and profitability of the banks that we rate are likely to suffer," said Standard & Poor's credit analyst Mohamed Damak, lead author of the report, "Tougher Environment Weakens Financial Profile Of Gulf Banks And Pressures Their Credit Ratings."

Indeed, we believe that 2009 will prove to be a difficult year for most Gulf Cooperation Council (GCC) banks.

"On a positive note, thanks to their good financial profile, Gulf banks have entered this tougher environment from a position of relative strength," said Mr. Damak.

In addition, we believe that GCC countries, which we classify as interventionist toward their banking sectors, have and will likely provide some extraordinary support to the systemically important banks if needed. The capacity of these countries to do so remains high in our opinion.

Economic conditions in the GCC rapidly deteriorated shortly after oil prices dropped from their peak in July 2008. At the same time, liquidity shrank because of rapid loan growth and the repatriation of foreign funds. In addition, stock markets in the region started to plummet in response to weaker economic and earnings prospects, a drop in investor confidence, and fall in business volumes. According to our estimations, real GDP growth in the GCC is likely to slow dramatically in 2009, by more than 50% from about 9.1% in 2008.

Gulf banks are carrying a high amount of new loans--including to the real estate sector and individuals--that the less supportive economic conditions is testing. The seriousness of the situation varies among the six GCC countries.

"We believe that the most resilient banking sectors are Saudi Arabia's and Qatar's. The banking sectors in the United Arab Emirates--especially in the emirate of Dubai--and Kuwait are under the most pressure. This explains the several negative rating actions we recently took on Dubai-based and Kuwaiti banks," said Mr. Damak.

To date, the ratings on about one-third of the GCC banks have a negative outlook or are on CreditWatch with negative implications. This suggests that additional negative rating actions could occur in 2009.

Global Arab Network

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