GCC mixed bag says report - 28th Sep 2011

The GCC remains a mixed bag of financial fortunes with some countries gaining economic strength while others remain reeling from financial and social instability.
In a recent report on the region titled ‘Q&A: Trends And Events Affecting Banks In The Gulf In 2011,’ Standard & Poor’s analysts Goeksenin Karagoez, Emmanuel Volland, Paul-Henri Pruvost, and Nicolas Hardy addressed a variety of subjects surrounding banks in the region
Among the issues examined they looked at the profitability of Saudi banks and potential recovery in Bahrain.
Saudi banks are among the most profitable and efficient in the GCC, according to S&P and this stems from a number of unique factors.
“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+),” said the firm’s credit analyst Nicolas Hardy.
“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.”
In addition, their cost of funding is low due to a high level of stable, unremunerated deposits, and 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 percent and higher,” said Hardy.
“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.”
The report also addressed the situation in Bahrain and whether it can regain its position as a financial hub.
“We think Bahrain was seen for a very long time as the centre 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.”
The effect of these incidents on Bahrain’s infrastructure should not be exaggerated, according to S&P, and the country will almost certainly remain an important financial centre in the GCC in the long run.
“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,” added Volland.
“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.

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