GCC banks face hurdles on path to recovery (page 1 of 2)

In the wake of the biggest global financial crisis in living memory, came the Arab Spring and six months of violence across the Middle East and North Africa (MENA) region. It has been a tough two years for the banking behemoths of the Gulf, and a report published this month by ratings agency Standard & Poor's (S&P) suggested that while Gulf banks were relatively stable and could look forward to improved prospects, sluggish loan growth and difficult funding conditions would ensure a slow, painful recovery from the financial crisis.

The ongoing political troubles across the MENA region pose only a minor risk to Gulf banking institutions, S&P said, as the majority of GCC banks covered by the agency have limited operations and exposures to those "underbanked" economies. Nevertheless the ratings agency could not rule out a further real estate correction, and noted that nonperforming loans (NPLs) have risen in Bahrain and the UAE.

Bahraini banks 'tarnished' by unrest

Retail banks in Bahrain in particular face a difficult 2011: while this year is likely to be better than last in the UAE in terms of asset generation, in Bahrain retail banks' growth is expected to lag behind GCC peers, S&P said.

"The unrest has tarnished the reputation of Bahrain, home to the GCC's largest offshore banking system," says Goeksenin Karagoez, Primary Credit Analyst on the S&P report. "Questions remain about how the country will regain its status as a stable financial hub."

In Dubai, meanwhile, the overall debt overhang remains a worry, and some large borrowers have been forced into discussions on debt restructuring with their lenders. According to the ratings agency, the UAE recorded a 25% rise in reported NPLs in 2010 compared to 2009, up to $3.9bn from $3.1bn.

"In the UAE the amount of reported restructured loans is especially significant," says Karagoez. "If we add this figure to reported NPLs, the ratio reaches into double figures for the country's banking system."

S&P furthermore noted that while the UAE banks
it rates (Abu Dhabi Commercial Bank, Mashreqbank, National Bank of Abu Dhabi and Sharjah Islamic Bank) are by and large less exposed to Dubai Group than they are to Dubai World, there is a risk that the troubles of nonrated banks could "weaken" the country's banking system due to negative market sentiment.

"This could also increase domestic and foreign lenders' risk aversion toward UAE corporate borrowers, and reduce their capacity to underwrite new loans," adds Karagoez.

The report divided Gulf banks into two groups by country: those that are moderately leveraged, and those that are overstretched. Oman, Qatar and Saudi Arabia are placed in the first group, with Kuwait, the UAE and Bahrain in the second. S&P warns that the financial troubles of some investment companies in Kuwait represent a tangible risk for the country's banks.

Indeed, the bank borrowings of Kuwaiti investment companies stood at around KD6.1bn ($22bn) in 2010, while the amounts at risk exceeded 100% of ATE of some domestic banks.

Consumer loan growth likely to slow in Qatar

Looking forward, S&P suggested that banks with significant government ownership in Qatar, and even Oman, are likely to find hostile funding conditions easier to bear than their Gulf peers.