Gulf banks are set to continue performing strongly, S&P says

"Gulf banks are benefiting from the rosy environment in their home markets and carry limited exposure to US subprime and structured investment products," said Standard & Poor's credit analyst Mohamed Damak. "As a result, business volumes are expanding, provisioning needs are minimal, and capital and commitment are forthcoming from deep-pocketed shareholders."

Risks do exist, however. Gulf banks carry a high amount of young loans on their balance sheets that have been untested by economic dislocations, including fast-growing exposures to the region's real estate sector. In addition, banks' appetite for M&A outside their own turf is growing. Although this strategy is helping banks diversify geographically, it could prove costly if the associated execution and integration risks are not controlled or if above-average credit risks in these countries materialize.

Over the past six months, Standard & Poor's has revised its outlooks on two banks to positive from stable, reflecting their improving financial performances and increased capitalization. "We aren't ruling out more positive rating actions--as long as the region's economic environment remains buoyant," said Mr. Damak.

In addition, we believe that more banks will seek ratings to gain greater access to capital markets in their hunger for long-term funding. They are trying to feed huge demand for loans, including real estate-related loans, which are resulting in widening maturity mismatches on their balance sheets.

Although long-term debt issuance has slowed dramatically in the Gulf as a result of the deterioration in global market conditions, we expect it to resume rapidly once the credit markets return to normal.