One of the main risks for Gulf banks is their exposure to the region's booming equity and real estate markets, Standard & Poor's Ratings Services said in a report, "Gulf Banks Are Vulnerable To Shocks On Real Estate And Capital Markets," published today.
"The boom is largely the result of the high oil prices, the repatriation of some funds invested abroad in the aftermath of Sept. 11, 2001, improved regional stability, structural reforms, and renewed confidence and investment opportunities in the region," said Standard & Poor's credit analyst Anouar Hassoune, lead author of the report. "However, it is also partially an artificial bubble that could burst--an unlikely, worst-case scenario that nevertheless could result from a major oil price shock or regional political crisis."
Although most large banks are well equipped to absorb a major correction, the impact on Gulf banking sectors would be great if both markets were to crash, Mr. Hassoune explained. This would especially be the case for banks in Kuwait (A+/Stable/A-1+), Saudi Arabia (A/Stable/A-1), and the United Arab Emirates (UAE, not rated), which are more exposed to these markets than banks in other countries of the Gulf Cooperation Council (GCC).
GCC stock markets have risen 70%-190% in the past two years--the fastest in the world. The average price/earnings ratio (P/Es) for the GCC was in line with the emerging-market average up to late 2003 but is now outpacing it and the historical regional average.
"We are concerned that the high multiples reflect excess liquidity in addition to improved economic fundamentals," said Standard & Poor's credit analyst Emmanuel Volland, co-author of the report. "Although these markets have unique features, their limited size, high concentration, and unsophisticated local investors add risks. Gulf capital markets are certainly at a critical point in time. A slight correction would have a manageable effect, while continued asset inflation could lead to more dramatic consequences."
The real estate market boom and its effects on banks are more difficult to quantify, due to lack of detailed public data. It can be said, however, that GCC banks have eagerly taken part in the real estate bonanza. Standard & Poor's believes that banks should focus their attention on risks, including the soundness of new projects and their underlying risks. We also believe that GCC countries should improve the quality of the data for this market, to the benefit of both banks and investors.