The credit crisis has jolted the global financial community, but what impact has it had on Gulf companies and banks? Analysts say it may take a while for the full impact of the US subprime concerns to be fully revealed, but some fallout has been immediate.
Days after the subprime meltdown was triggered, the cost of borrowing for regional companies shot up as banks suddenly lost all appetite for risk.
“The stress in the US subprime mortgage market has spread to other countries and other debt classes, including the usually liquid and safe overnight interbank and commercial paper markets,” said one analyst recently. “Unsure of who is holding toxic loans, banks have balked at lending even to one another for just one day.”
Saudi Basic Industries Corp (SABIC), for instance, reduced the size of a planned offering of senior unsecured bonds and dropped the proposed sale of a euro tranche of the notes amid the ongoing uncertainly in global credit markets.
Meanwhile, Qatar’s bid to buy Sainsbury has also been hit, as turmoil in financial markets threatened financing of the transaction and dragged the share price well below Qatar’s offer price for the British retailer, via its Delta II fund.
Meanwhile, Emaar Properties is probably the only major regional company directly exposed to the US mortgage market.
The crisis also appears to have raised pricing of upcoming securitizations in the Middle East, according to Nasser Al-Sheikh, chairman of Islamic finance lender Amlak Finance.
“The escalating mortgage crisis might increase price of bonds by an average of 10 basis points,” Al-Sheikh told Arabic news channel Al-Arabiya.
Amlak Finance had in June announced plans to sell an AED1 billion ($270 million) asset-backed securitization to regional and international investors. Mushtaq Khan, an analyst at Citibank, notes that spreads on Islamic bonds widened in response to global credit worries, while local equity markets have seen a sell-off driven by foreign investors exiting the market.
“However, this may only delay new issuers coming to the market, but is unlikely to interrupt investment plans, in our view,” Khan said.
“If anything, with jittery markets in the developed world, the still healthy oil surplus may find the GCC and Asia more lucrative, in our view,” he said. Appetite for project financing in the Gulf is the highest in the world, and governments are keen to ensure that this investment momentum remains in place, he noted.
Concerns that Arab investors may put additional squeeze on global liquidity by not investing, also appears to be overplayed. Investment of petrodollars is increasingly sophisticated, which means jittery global markets could be more of an opportunity than a deterrent.
“Mubadala, an Abu Dhabi government investment agency, has said that it finds current conditions an ideal time to find bargains, and is willing to borrow more for foreign acquisitions,” Khan said.
“With the inflow of petrodollars likely to stay robust for the remaining part of this year, Gulf appetite for local and regional development, and private equity driven foreign acquisitions are likely to continue.”
But what about Gulf banks? Are they vulnerable to the crisis or are they fairly insulated?
The regional banks have had a fantastic run in the first half of the year. Data compiled by Zawya.com shows that assets of the region’s top 20 listed banks rose by 35 percent to $437.7 billion, while net profit rose by nearly 13.5 percent in the first half of the year, compared to the same period last year.
UAE’s First Gulf Bank (FGB) saw the highest increase in assets, by nearly 70 percent, while Kuwait Finance House posted the greatest improvement in net profit of 56 percent in the first half of the year, compared to the same period last year.
Lending among the top 20 GCC banks also rose by 33 percent to $262.8 billion, with FGB once again leading the way with a 70 percent jump in gross loans.
Interestingly, FGB had delayed its $3.5 billion debut bond in July because of market volatility, and it is interesting to see whether it will impact on the bank’s growth.
“Gulf banks’ cost of debt is going to rise,” Phillip Smith, senior credit analyst at Fitch Ratings, told Zawya.com.
Less discussed is the Gulf’s bank exposure to global hedge funds, which have also suffered a backlash.
“The exposure to the global hedge funds is relatively limited (and with a good diversification) for GCC banks, meaning that the impact on their profitability should be limited,” Emmanuel Volland, director — Financial Services Ratings at Standard & Poor’s, told Zawya.com. “We do not expect rating changes.”
In a report, S&P estimates that the aggregate subprime exposure of the region’s top 20 banks stands at less than 1 percent of their total assets due to three main reasons: profitable domestic markets, limited expertise and Shariah-compliant issues.
Even so, it is probably the last major global financial crisis that may have swept past the region without too many inconveniences.
As regional funds hunt for fresh international investments, regional banks raise their exposure to international assets, and foreign investors increasingly dive into the regional equity markets. The region may catch a severe cold the next time the rest of the international financial community sneezes.
(Yadullah Ijtehadi is the managing editor of Zawya.com)
