ABC results confirm Gulf credit woes

Dubai: The Arab Banking Corporation (ABC) on Sunday announced a 38 per cent decline in its 2007 net profit to $125 million from $202 million in 2006, becoming one of the first Gulf banks to officially admit US subprime related losses.

The bank said in a statement that this significant drop was due to the net provision of $230 million resulting from securities writedowns that the group was obliged to take in the wake of the global credit squeeze that followed the US sub-prime housing loan crisis that erupted in August and has steadily worsened, cushioned by credit write-offs and recovery of impaired loans.

"Whilst adverse market conditions over the second half of the year impacted our annual result, ABC's core business activities continued to demonstrate strong growth, benefiting from the sustained increase in oil prices that is fuelling regional development and economic growth," said Gazi M. Abdul Jawad, president and chief executive.

In a ratings revision, Moody's has revised the outlook on Gulf International Bank's (GIB) A2/Prime-1 deposit ratings and A3 subordinated debt ratings of GIB to negative from stable. Most banks' problems stemmed from collateralised debt obligations (CDOs).

These securities are created when pools of debt, some of it tied to subprime mortgages, are sliced into pieces carrying different levels of risk and return, and then sold to investors.

Although regional central banks have insisted in the past that Gulf banks are insulated from the subprime losses in the US, the substantial decline in US residential mortgage-backed securities (RMBS) and structured investment vehicles (SIVs) has put pressure on a number of regional banks' bottomlines.

In a recent report HSBC's analysts hinted at Abu Dhabi Commercial Bank (ADCB) incurring some losses related to US assets in the fourth quarter.

Several banks in the region are believed to have varying degrees of exposure to US subprime assets. However, most of these are classified as 'held to maturity' and will not be marked to market and hence would take longer to show up on balance sheets unless the managements opt for an immediate writedown.