In a report titled “A growing economy and strong capitalization keeps Gulf banks on a path to recovery, S&P said that in line with forecast for average 4.6% GDP growth in the GCC for 2013 should keep demand for bank credit high and expand banks’ earnings.
“We believe strong bank lending on the back of corporate and infrastructure growth will help expand revenues of banks in Saudi Arabia, and Qatar,” Timucin Engin, Standard & Poor’s credit analyst, said. “Specifically, we expect average lending growth to remain above 10% level for Saudi Arabia.”
“In Kuwait, the United Arab Emirates (UAE), and Bahrain, however, which have seen a less pronounced rebound in growth, we envisage a slower pick-up in lending. Yet, loan losses are gradually declining at banks in these countries because they cleaned up their balance sheets between 2008 and 2012. This should continue to foster a recovery in profitability in the region, albeit at a slower pace than in recent quarters.
Despite some differences between individual countries, we expect Gulf banks’ interest margins and cost-to-income ratios will remain stable over the coming quarters, and that credit losses will continue to fall, although at a slower pace than in previous years. This should ultimately translate into healthy profit growth for Gulf banks.
“The banks are also likely to use their strong capitalization to continue to strengthen their market positions internationally, the report says. Gulf banks have an average un-weighted risk-adjusted capital (RAC), according to Standard & Poor’s framework, of about 12%-13% as of Dec. 31, 2012–about five percentage points higher than the un-weighted average 6.9% for the 100 largest banks Standard & Poor’s rates, based on data ranging from year-end 2011 to June 30, 2012. As European banks are shedding assets in the Middle East and North Africa (MENA) to shore up their balance sheets in the aftermath of the financial and sovereign crises, well-off Gulf banks in GCC are taking their place. In 2012, we saw a sharp rebound in acquisitions by some of the larger Gulf banks, especially in Turkey and Egypt, taking advantage of prices that were significantly lower than before the crisis. We expect the trend to continue this year,” S&P added.
“The banks are also capitalizing on appetite in regional and international debt capital markets for long-term debt issuances at attractive prices, amid historically low interest rates and healthy investor demand. According to data we’ve compiled from external sources, issuances reached $15.3 billion, representing 171% growth relative to 2011. The bulk of these were in the form of five-year bonds and sukuk (Islamic financial certificates). We expect that the banks will continue to tap debt capital markets this year to benefit from currently accommodative pricing conditions.”
“We see some downside risks for banks, not least from the region’s dependence on oil prices and structural political risks, particularly stemming from Iran,” Engin, added.
“However, we think favorable economic conditions and the banks’ sound capital and funding positions will outweigh these risks. For this reason, the outlook is stable on 23 of the 26 banks we rate in this region and we expect the ratings will stay broadly stable through 2013.”