Gulf News

Gulf banks survive market correction in fairly good shape

S&P warns of weaker assets quality

- Gulf News Report

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.

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