GCC banks facing another tough year

23. Feb. 2010

Ratings agency Standard & Poor has said it believes that 2010 will be another difficult year for Gulf-based banks as they continue to clean up their loan books.

In a new report, the agency said the global economic slowdown and financial crisis had put the banking sector in the region to the test over the past 18 months, during which it had taken dozens of negative rating actions in the sector.

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

"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 S&P credit analyst Mohamed Damak.

"Despite the fact that we remain cautiously optimistic that economic conditions will improve, we do not exclude further negative rating actions in the short term."

It said the financial standing of Gulf banks as a group remained "under pressure" despite recent signs of recovery in their respective national economies.

"Overall, we have noticed a marked increase in nonperforming loans (NPLs), with the NPLs to total loans ratio reaching 5.4 percent on average on September 30, 2009, compared with 2.7 percent at year-end 2008," the report added.

Accounting for most of the increase were Kuwait and Dubai-based banks, it said.

"We expect asset quality indicators to further deteriorate in the next few quarters as the economic slowdown continues to take its toll on the corporate and retail sectors," said Damak.

The announcement regarding the restructuring of Dubai World, including a requested standstill on all loans to it and its its real estate subsidiary Nakheel "exacerbated the problems of Dubai-based banks", S&P added.
[Arabian Business, by: Andy Sambidge]