Subprime crisis will not affect Gulf banks

Dubai: While banks across the globe are feeling the heat in the wake of the US subprime mortgage market collapse, Gulf lenders seemed to be relatively less exposed, indicating that the knock-on effects of the deterioration in the market will be limited, according to a ratings agency survey.

"Our main finding is that the vast majority of banks have no or insignificant exposure to US subprime instruments," says Emmanuel Volland and Mohammad Damak, credit analysts at Standard & Poor's in a report following a survey of 20 of the largest banks in the Gulf.

"The aggregate subprime exposure of the banks... stands at less than one per cent of their total assets. The bulk of the exposure is concentrated on a few issuers. Two-thirds of the aggregate exposure is high-investment grade (mainly in the 'AAA' and 'AA' categories), however."

The agency does not expect negative rating actions on these Gulf banks in the near future due to subprime-related problems.

Current market disruptions will have limited effects on the financial profile of Gulf banks, especially to the cost of funds for wholesale funding, it adds.

Tightening credit conditions have forced some GCC banks to postpone some debt issues, including that of UAE-based Dana Gas and Abu Dhabi-based First Gulf Bank. But with a solid economic growth outlook in the light of high oil prices and financial profiles of banks strong with good asset quality, high profitability and robust capitalisation, the report says that most of these deals are likely to close successfully after summer.

Lessons

As senior banking analyst at investment bank EFG-Hermes Raj Madha says, that local banks having already learnt their lessons from systemic risks back in 1990s were quite conservatively positioned going into the current bout of turmoil.

But will underwriting by the investment and commercial banks in the region revert to normal in the coming months given the ongoing turbulence in the global market?

It is a mixed scenario, believes Madha.

"Even if the dynamics here are different from the dynamics elsewhere in the world, it is unlikely that the way investors look at credit is going to be different from rest of the world. Cost of credit is going to be higher than it would be in a more stable global environment."