S&P report addresses issues facing banks this year in GCC

Standard & Poor's discussed, among other issues, the outlook for Bahrain's banking sector and status as a financial hub in a report published today, "Q&A: Trends And Events Affecting Banks In The Gulf In 2011." 

In a series of questions and answers, Standard & Poor's analysts Goeksenin  Karagoez, Emmanuel Volland, Paul-Henri Pruvost, and Nicolas Hardy also addressed:

- The above-average profitability of Saudi banks;

- Debt restructuring and provisioning for banks in the GCC, especially Dubai, Bahrain, and Kuwait; and

- The implementation of Basel III in the GCC (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates).

This article follows publication of our report card, "Banks In The Gulf Are On The Way To Recovery, But Has The Dust Settled?" on May 31, 2011, and a teleconference on the subject on June 1, 2011. We have based this article's 
questions and answers on an abridged transcript of the teleconference. 

Here are extracts of some of the questions and answers: 

Why are banks in Saudi Arabia among the most profitable and efficient in the GCC?

"The profitability of Saudi banks stems from a unique combination of factors," said Standard & Poor's credit analyst Nicolas Hardy. "They operate in a supportive operating environment because of high oil prices and the backing of a cash-rich sovereign (Saudi Arabia; AA-/Stable/A-1+). They also benefit from a protected franchise with high barriers to entry and a limited number of players: there are 12 commercial banks, with widely varying market positions, of which we rate eight. Saudi banks also benefit from structural advantages regarding costs," said Mr. Hardy. 

"Their cost of funding is low due to the high portion of stable, unremunerated deposits. Efficiency ratios are low because of the low cost of labor. Cost of risk was well-contained and banks had the ability to provide gradually for nonperforming loans provisions up to conservative levels, that is, up to 100% and higher. Finally, like in other GCC countries, banks do not pay business tax. So, in the end it explains why in Saudi Arabia we have seen very good and resilient profitability indicators," Mr. Hardy added. 

How can Bahrain regain its status as a financial hub, if it is even possible?

"As a rating agency it's not our role to give advice or to make recommendations about how a country can regain status or build up confidence. Obviously, a lot is related to investor confidence. We think Bahrain was seen for a very long time as the center for wholesale banking in the Gulf, with a good infrastructure, good regulation, and track record," said Standard & Poor's credit analyst Emmanuel Volland. 

"Obviously, there have been a few incidents over the past few years with the failure of some wholesale banks, questions about regulatory oversight, and, on top of that, the political unrest in Bahrain. So I think it has raised some question marks among the financial community," said Mr. Volland. "At the same time we think we should not exaggerate about the effect of these incidents on the infrastructure--the potential of Bahrain. Standard & Poor's has no serious doubts that Bahrain is going to remain an important financial center in the GCC. However, we note that it was already under pressure from competition from Qatar and Dubai, which now have a good opportunity to take a more important role in the region," he added. 

"Again, we think if the political situation remains stable, the authorities should be able to convince investors that Bahrain remains a key financial center for the region," said Mr. Volland. 

The report also addressed such other questions as:

- Do the balance sheets of banks based in Dubai, Bahrain, and Kuwait carry large unprovisioned exposures?

- How significant was the capital flight during the crisis in Bahrain and has the situation stabilized?

- Could you elaborate on the implementation of Basel III in the UAE and the impact on hybrid capital, especially on the Ministry of Finance with regard to their deposits?