- By Region
Gulf banks are on average better capitalised than their global peers and look set to remain largely immune to the European crisis in the coming years, according to a report by Standard & Poor’s, the rating agency.
The 26 Gulf banks covered by the agency have risk-adjusted capital ratios – a measure of a bank’s ability to absorb risks – of 12-13 per cent, about 5 percentage points higher than the 100 largest global banks covered by S&P.
The strong capitalisation is thanks in part to high regulatory requirements, but also because of conservative management at the banks.
Unlike their global peers, the Gulf banks tend to keep their reserves well above the regulatory minimums, the agency says. That translates into mostly stable outlooks for the lenders, even as global economic conditions look set to deteriorate as the European crisis comes to a head.
“The outlook is derived from the expectation that their capital metrics will remain stable,” said Paul-Henri Pruvost, an analyst at Standard & Poor’s and author of the report. “A stable outlook means we don’t expect the Gulf banks to be affected by Europe’s troubles in the coming two to three years.”
While the banks reap the benefits of doing business in an oil-rich region with supportive governments and growing economies, they also pay a price.
While global banks tend to benefit from diversification – between industries, regions and customers – those in the Gulf show more concentration, often heavily exposed to a small group of borrowers, sectors or countries. Such practices heighten a bank’s risk profile, S&P says.
Saudi Arabia’s banks are the region’s best capitalised, according to the report, with the least capitalised to be found in Kuwait.
Only four of the 26 regional banks covered have been assigned negative outlooks by the agency – two each in Kuwait, where S&P sees higher economic risk than in other Gulf states, and Bahrain, where the country’s sovereign rating has been downgraded since protests erupted in 2011.
And while Europe’s troubles reverberate through the world economy, they also mean opportunities for Gulf lenders, as continental banks withdraw from overseas markets.
“Lending for Gulf banks is not expected to be very high but there are still opportunities there because international banks are retreating,” says Mr Pruvost. “There is an opportunity for Gulf banks to fill the void – not entirely, because they’re not significantly sizeable to fill their shoes, but there are opportunities.”
In their exposure to distressed sovereign debt and complex derivative products, European lenders are a riskier proposition than the more cautious and conservative banks of the Gulf, says Emad Mostaque, a strategist at Religare Noah in London.
“The Gulf banks didn’t get into as much of the sophisticated stuff, they are basically still doing banking the way it should be – you borrow and you lend,” he says.
The back-to-basics approach means the lenders will more easily benefit from economic growth in their home markets, which is all but guaranteed thanks to vast infrastructure projects across the region.
“They are leveraged on sovereign spending,” Mr Mostaque says. “And would a European crisis impact government spending at home? I think after the Arab spring, the answer is No.”