Gulf banks survive market correction in fairly good shape
S&P warns of weaker assets quality
GCC banks are coming out of the stock market correction in their local markets in good shape, but some are likely to see weaker asset quality and profitability in the future, Standard & Poor's said in a report yesterday.
“The financial performance of banks in the Gulf is being supported by very good operating environments that will likely prevail in the foreseeable future. However, asset quality and ultimately profitability at some banks are likely to slightly weaken,” said S&P’s credit analyst Emmanuel Volland in a report: “Gulf Banks Face Challenges From A Position Of Strength.”
The 2006 stock market correction in the GCC had limited effects on the very strong financial performances of the majority of banks. “Most of the banks in the region will be challenged to give repeat performances in 2007 of their very strong earnings, as the previous year’s results were partially driven by extremely high turnover on the stock exchanges,” Volland said.
According to the report, the stock market correction increased the risk profile of the banks’ retail loan portfolios and triggered additional provisioning requirements that raised the average cost of risk, which could weigh on future profitability. The equity market correction also put pressure on households’ dis- posable income and reduced their ability to withstand other systemic or specific shocks.
Despite the reduced profit outlook, S&P said financial institutions in the Gulf have large, unexploited opportunities that stand to hold aloft their balance sheets in the medium to
The sector witnessed an unprecedented rise in international debt issuance in 2006 as banks sought to enhance their funding mixes and reduce maturity mismatches.
long term. One opportunity in particular, mortgage lending, will require banks to seek access to long-term funding sources.
The Gulf banking sector witnessed an unprecedented rise in international debt issuance in 2006 as banks sought to enhance their funding mixes and reduce maturity mismatches.
“We believe this trend is set to continue in the future as banks keep on building up their loan portfolios, especially given our expectations that the mortgage sector will become an attractive engine for growth, if the legal environment continues to improve,” said S&P’s credit analyst Mohammad Damak.