LONDON, 6 September 2006 — Prospects are good for banks in the Gulf due to strong regional economic growth, said Standard & Poor’s Ratings Services in a report published today, “Prospects Remain Good For Banks In Gulf Despite Stock Market Pullback, Geopolitical Tensions.”
“The booming regional economy is clearly an opportunity for banks to make further progress in building their customer franchises and diversifying revenues,” said Standard & Poor’s credit analyst Emmanuel Volland, author of the report.
At the same time, most banks will be challenged to repeat their stellar financial performances of 2005, as regional stock markets suffered heavy losses in the first half of 2006. In addition, geopolitical risk has increased in the Middle East.
“We nevertheless believe that Gulf banks will continue to display solid financials, capitalization, and liquidity in the foreseeable future,” said Volland. “They stand to benefit from huge business volumes, a low cost of funds and labor, and the absence of income tax.”
With the assignment of nine new ratings over the course of 2006, Standard & Poor’s rapidly extended its ratings coverage in the Gulf, where it now rates about 30 banks - including most of the 20 largest.
Extraordinary growth of the high-yield and low-risk consumer-lending business line is a crucial element supporting the profitability and, ultimately, the ratings on most banks in the region, particularly in Saudi Arabia and Kuwait.
Looking back at 2005, the report notes several trends in the Gulf banking system: Rapid asset growth and an upsurge in bank profits; a phenomenal increase in debt issuance; and accelerated growth of Islamic finance, with the creation of new Islamic banks and the emergence of new products.
Geographic expansion appears inevitable, as Gulf banks remain small by international standards, are constrained by an underdeveloped operating environment, and face increasing competition on their own turf from foreign banks.