Loan Losses and Impairments Exceed $20 Billion For Gulf Banks, says S&P

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Gulf Banks Are Resisting Despite Strain On Liquidity, Says Report Card
DUBAI, September 1, 2010--Standard & Poor's Ratings Services believes that the Gulf banks it rates appear to be showing signs of improvement, after spending more than $20 billion on loan loss provisions and investment impairments since 2008. Thanks to high oil prices and government policies, the economies in the Gulf Cooperation Council (GCC)--comprising Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates (UAE), and Oman--are starting to recover, according to a report published today, titled "Gulf Banks Are Weathering The Storm But Still Face Tight Liquidity."

"We believe the asset quality of Gulf banks should improve from 2011 and that their good margins and efficiency will provide a solid foundation for their return to high profitability," said Standard & Poor's credit analyst Mohamed Damak.

But challenges lie ahead. Improving liquidity, funding future growth, and refinancing the stock of existing debt are the next hurdles facing Gulf banks.

"We believe that the defaults of the Saad and Algosaibi Groups, the restructuring of Dubai World, and the concerns that financial difficulties may spread to other Dubai-based government-related entities (GREs) have somewhat dampened global market access to the GCC-based financial institutions," Mr. Damak added.

On a positive note, Gulf banks are slowly rebuilding their stock of liquidity to face upcoming maturities, and have revised downward their growth strategies. We also classify the six GCC countries as "interventionist" toward their banking systems, meaning that we believe that these countries are highly likely to provide extraordinary support to their highly systemically important  banks in case of need. Such support, as we have seen in the recent past, could ease the pressure on Gulf banks' liquidity.

Other positive factors for most Gulf banks we rate include their good capitalization. Standard & Poor's calculates its average risk-adjusted capital (RAC) ratio for Gulf banks it rates at 10.2% before adjustments at year-end 2009, or almost twice the average ratio for the top 45 banks in the world. In our opinion, this provides a sturdy shelter from unexpected shocks.

Over the past six months, we have taken a range of rating actions on Gulf banks. We changed the outlooks on some Kuwaiti banks to stable from negative, and upgraded two Saudi Arabian banks to reflect our views of their resilience. We also raised the ratings on UAE-based Mashreqbank after we reassessed the likelihood of extraordinary government support it is expected to receive in  case of need. However, we also took some negative rating actions on other UAE-based banks. This was due to uncertainties surrounding their exposure to Dubai World and other Dubai-based GREs, as well as significant exposure to the real estate sector, which in our view has weakened their stand-alone credit profiles (SACP). Indeed, the majority of our outlooks on the ratings of UAE  banks remain negative to reflect our views about their operating environment.

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© Press Release 2010