Moody"s: GCC banks face structural asset-quality challenges and event risk, but gov't support remains positive rating factor

London, 7 July 2011 -- The 49 Moody"s-rated banks across the six Arab countries that form the Gulf Cooperation Council (GCC) are likely to continue to face structural asset-quality challenges and elevated event risks over the next credit cycle, says Moody"s Investors Service in a Special Comment. However, the rating agency points out that government support remains a crucial positive rating factor.

The principal factor that underpins these banks' structural asset-quality challenges are the undiversified GCC economies that are dependent on oil and gas exports, an aspect that tends to magnify the impact of economic cycles on the banks. This is exacerbated by the dominant role of governments and large family-owned conglomerates in the region, which then leads to large sector and single-borrower concentrations in bank loan portfolios. As such, a few large corporates in distress or a downturn in one key sector can have an outsized effect on bank asset quality. This overall lack of diversification generally makes the region, and therefore its banks, more vulnerable to political, economic and credit event shocks.

Political event risk is another factor that affects GCC banks. Recent unrest in Egypt, Tunisia, Jordan and GCC member state Bahrain has already weakened the credit strength of banks domiciled in these countries, and resulted in negative rating actions. In Moody"s opinion, the recent unrest across the broader Middle East and North Africa (MENA) area has left the GCC region with a significantly higher level of event risk. Regional tensions can materially and rapidly alter the operating environment for banks. This can, in turn, also have a significant negative impact on asset quality, both in the short and long term, while liquidity and other aspects of a bank"s standalone credit strength can also be affected.

However, a crucial positive factor that underpins the majority of Moody's ratings for banks' debt and deposits is the solid track record of GCC governments in supporting their banks, both directly and through various economic initiatives. Moody's recognises that all GCC governments have thus far demonstrated a strong willingness to support their banking systems and that this capacity of governments to support their banks is underpinned by their vast energy resources and the associated revenues. There are, however, important differences among GCC countries" financial positions in relation to the size of their banking systems, resulting in differences in their support capacity. For some GCC countries, their future ability to support banks may be negatively affected as a result of rapidly increasing government expenditures in an effort to relieve recent social and political pressures.

Looking ahead, despite the economic recovery that has broadly taken hold across the GCC region since 2010, Moody"s expects these structural asset-quality challenges to persist through the next cycle. The economic base and institutional structure of the member states are unlikely to change substantially over the next few years. As a result, structural asset-quality challenges will continue to limit GCC banks' credit strength and constrain many of their standalone ratings.

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© Press Release 2011