Fitch downgrades several GCC bank individual ratings, most IDRs affirmed

The downgrades come as Fitch releases a new report which assesses the growing impact of the global credit crisis on GCC financial institutions.

A full breakdown of the rating actions is provided at the end of this commentary.

Most GCC banks' Issuer Default Ratings (IDRs) remain driven by Fitch's view of the probability of support from the respective sovereign authorities, and most of these have been affirmed by Fitch today.

The exceptions are the downgrades to the IDRs of Dubai Bank and TAIB Bank, respectively owned 70% and 60% ultimately by Dubai Holdings, whose creditworthiness is in turn strongly linked to the Dubai government.

Dubai's creditworthiness has deteriorated, despite strong support from the UAE federation, due to the worsened economic outlook and the pressure this will put on Dubai's public finances.

However, Fitch's view of the standalone financial strength of many GCC financial institutions, reflected in the Individual rating, has changed as the impact of the global economic crisis spreads into the region.

The exposure of GCC banks to the global credit crunch has been reflected in the downgrades of certain GCC financial institution Individual ratings.

"Fitch's outlook for GCC banks has become less favourable as it has become evident that the region's banks and financial institutions will not be able to fully insulate themselves from the global credit crisis."

said Robert Thursfield, a Dubai-based Director in Fitch's Financial Institutions group.

"GCC banks are now feeling the effects of the crisis which is likely to cause deterioration in banking sector profitability and capitalisation going forward."

The outlook has moderated as other factors have also begun to negatively impact the GCC operating environment.

In recent years, rapid credit growth, increased loan deposit ratios within the banking systems and asset price bubbles, to varying degrees across the region (particularly in the property sector), have made banks generally more sensitive to a global, as well as a domestic, downturn.

Although performance and financial standing remained adequate for most banks in 9M08, problems have emerged and increased in Q408.

The credit crisis has resulted in weakened liquidity in GCC banking systems and is expected to contribute to lower regional economic growth.

Sharp falls in oil prices will likely result in a decline in GCC government spending on infrastructure projects, which may be postponed or cancelled, leading to lower growth rates in the GCC economies.

Capital markets and international wholesale funding options are now limited for GCC banks, although most are less reliant on wholesale funding compared to banks in other regions.

This is expected to negatively impact funding costs and growth prospects for GCC financial institutions.

In terms of asset valuations, significant declines in regional stock markets in H208, as well as further falls in the market values of international debt securities, equities and hedge funds, are likely to result in substantial fair value losses for investments through both equity reserves and the income statement for many GCC banks.

A regional property market bubble appears to have begun to deflate as property prices have started declining, particularly in Dubai, with price falls made worse by a scarcity of credit for real estate financing.

There is a growing realisation that the GCC is not decoupled from the world economy and this appears to be reflected in the deteriorating business sentiment across the region.

All these systemic factors, coupled with relatively high levels of inflation, are likely to put stress on GCC corporates and individuals, which is likely to lead to increased loan delinquencies.

The average Individual rating for GCC banks remains 'C', denoting an adequate bank.

However, there are significantly fewer banks rated 'B' (defined as a strong bank with no major concerns) and significantly more rated below 'C'.

Saudi Arabia remains the region's strongest banking sector with a Fitch Banking System Indicator (BSI: a weighted average of bank Individual ratings) of 'B' (seven banks rated 'B/C' and three rated 'C').

Bahrain and Qatar also have a BSI of 'B', although Bahrain has banks rated below 'C' and the majority of rated banks in Qatar are 'C'.

The BSIs for both UAE and Kuwait have declined to 'C' from 'B' following today's rating actions. Oman's BSI remains 'C'.

Fitch has reviewed 48 banks and non-bank financial institutions across the six GCC states.

Fitch provides Sovereign ratings on Abu Dhabi and Ras Al-Khaimah in the UAE, Bahrain, Kuwait, and Saudi Arabia.