M&A and real estate drive Gulf banks' future growth and risks

Gulf banks have started to explore new opportunities outside their home markets in order to increase diversification and limit the effect of increasing competition in their home market. Several M&A have taken place or been announced over the past few months and we expect additional cross-border transactions in the near future.

"Standard & Poor's Ratings Services regards this trend positively, but specific rating implications depend on several factors, including the strategic rationale for the transaction, the target country and entity, the
amount invested, and the source of financing," said Standard & Poor's credit analyst Mohamed Damak.

Gulf banks continue to operate in a highly supportive economic environment that is expected to prevail in the foreseeable future.

In addition to geographic expansion, several new opportunities arising within the Gulf Cooperation Council (GCC) are likely to help banks sustain their strong financial performance, but also lead them to incur new risks. We view the real estate sector, in particular, as a significant source of risk.

While Gulf banks showed strong resilience to the correction that took place on the GCC stock markets, their ability to withstand a major systemic shock in the real estate sector appears more limited. This is not our base case scenario, though.

Standard & Poor's has taken several positive rating actions over the past six months, with four Gulf banks being upgraded to 'A+', reflecting not only their strong financial performance but also the positive momentum in their respective economies. If no major turbulence occurs in the meantime, the medium term outlook seems positive for a variety of reasons, including both systemic and specific factors.

"We also expect the number of rated entities to further increase along with Gulf banks' need to raise additional long-term funding to finance their rapid asset growth," said Mr. Damak