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Dubai: GCC based banks, which reported a substantial decline in profits last year, are recovering fast from the impact of market corrections, according to analysts at international rating agencies.
In its assessment of the region's banking industry, Standard and Poor's (S&P), in its report said that despite the market correction, the asset quality of banks in Saudi Arabia has improved substantially due to the very strong economic environment and conservative provisioning policies.
The banking system in Saudi Arabia is the largest in the Gulf and among the most profitable. "The profitability of Saudi banks is among the strongest worldwide owing to high levels of non-remunerated deposits, good cost control, and a focus on profitable consumer banking activities," said S&P credit analyst Anouar Hassoune.
The 2006 stock market correction in the GCC had limited impact on the very strong financial performances of the majority of banks in the region. According to S&P, the stock market correction last year increased the risk profile of the banks' retail loan portfolios and triggered additional provisioning requirements that raised the average cost of risk.
Although GCC banks are coming out of the stock market correction in good shape in their local markets, some are likely to see a dip in profitability, said an analyst. "Most of the banks in the region will be challenged to give repeat performances in 2007 of their very strong earnings, as the previous year's results were partially driven by extremely high turnover on the stock exchanges," said Emmanuel Volland, an analyst with S&P.
Rating agency Moody's also recently revised its ratings of GCC banks with a positive outlook on their asset quality. Its latest assessment is based on the application of its refined joint default analysis (JDA) and updated bank financial strength rating (BFSR) methodologies.
While the BFSR method evaluates the intrinsic fin-ancial strength of banks, the JDA methodology incorporates the potential for external support into a bank's local currency deposit rating.
According to Moody's, the strong sovereign support enjoyed by GCC banks make them less susceptible to risks on deposit and debt obligations.
S&P too believes that strong sovereign support is an additional source of strength to the GCC banks. "Our assessment of the Saudi banking system takes into account the highly supportive approach of the country's authorities, which nevertheless, leaves the industry vulnerable to moral hazard," said S&P's credit analyst Paul-Henri Pruvost.
Concern: Crash in realty prices may create havoc
- GCC banks demonstrated their ability to weather the effects of the crash in local equity prices in 2006, when they plummeted by more than 50 per cent.
- Rating agencies consider a tumble in real estate prices, although unexpected, would have severe consequences.
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