Difficult year for Gulf Banks

Tuesday, 23 February 2010

2010 will be another difficult year for Gulf banks as they continue to clean up their loan books, an effort that will weigh on their financial performance, says Standard & Poor's in a new report.

The global economic slowdown and financial crisis have put the banking sector in the Gulf to the test over the past 18 months. Standard & Poor's took dozens of negative rating actions in the sector throughout 2009. They largely reflect the consequences of the unfavorable economic conditions on profitability and asset quality, especially for banks in Kuwait and Dubai. They also take into account bank-specific factors, such as for Gulf Bank (BBB-/Negative/A-3) or investment banks in Bahrain, said the report.

To date, about one-third of the company's 30 ratings on banks in GCC have a negative outlook. However, the outlooks on most Saudi banks and on all Qatari banks remain stable.

"Indeed, we see a growing disparity in credit quality among banks in the Gulf, between the stronger Saudi and Qatari banks on the one hand and the relatively weaker Dubai, Kuwaiti and Bahraini investment banks on the other," said Standard & Poor's credit analyst Mohamed Damak.

Despite the fact that the company remains cautiously optimistic that economic conditions will improve, it does not exclude further negative rating actions in the short term.

The financial standing of Gulf banks as a group remains under pressure despite recent signs of recovery in their respective national economies, said the report. Lower business volumes, asset quality deterioration and subsequent provisioning needs and pressure on liquidity appear to be affecting the creditworthiness of Gulf banks to differing degrees.

Overall, Standard & Poor's has noticed a marked increase in non-performing loans, with these loans to total loan ratio reaching 5.4 per cent on average on September 30, 2009, compared with 2.7 per cent at the end of 2008. Accounting for most of the increase were Kuwait- and Dubai-based banks and exposures of some of the Gulf banks Standard & Poor's rates to the Al Gosaibi and Saad groups, which defaulted in the second quarter of 2009.