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Asset quality of GCC banks improve as credit losses fall.

Dubai: Nonperforming loans (NPL) to gross loans ratio for banks in the Gulf Cooperation Council(GCC) region increased sharply in 2008 and 2009, but has been gradually declining since 2010.

Several factors have contributed to the improvement, including a supportive economic environment. For example, Kuwaiti banks wrote off certain loans and restructured others. Restructurings also occurred in the UAE and in certain banks in Qatar. As the GCC corporate market has recovered over the past three years, fewer loans have become NPLs. Since 2009, aggregate credit losses for the rated banks have declined visibly.

At the start of 2008, the Gulf banks rated by Standard & Poor's (S&P) had loan-loss coverage of about 140 per cent. This declined sharply to about 79 per cent in 2009 as NPLs spiked and banks used their excess reserves to limit the impact of the NPLs. Since then, bank coverage levels have improved every year, exceeding 100 per cent as of September 30, 2013.

"We expect the aggregate NPL ratio for the rated GCC banks to improve slightly in 2014. However, because most rated banks are increasing their loan-loss reserve coverage levels to build up additional reserves, we do not anticipate the ratio of credit losses to average assets to decline as sharply in 2014 as it has in recent years," said Timucin Engin, Associate Director, Financial Services Ratings, Standard & Poor's.

Both rating agencies expect the GCC banks to continue to benefit from stable sources of funding from government and retail deposits, boosting their funding and liquidity. Gulf banks traditionally fund themselves through domestic deposit markets at attractive rates; except for Bahrain's wholesale banks for which foreign funding plays a more important role. Deposit growth has grown faster than new lending. The net loans to deposits ratio, which peaked at 94 per cent for the rated Gulf banks in 2008, gradually declined to 86 per cent in 2012 and 2013.

Moody's expect strong operating environment in the region is expected improve asset quality, lower provisioning and higher demand for credit.

"Buoyant GCC economies will lead to improving asset quality for the region's banks, hence lower provisioning expenses and higher profits, helping maintain strong capital buffers despite the robust demand for credit," said Khalid F. Howladar, Vice President-Senior Credit Officer at Moody's.

Low interest rates continue to limit Gulf banks' net interest margins, however most banks have seen a gradual decline in loan losses. Analysts expect this to continue to support earnings growth in 2014, but by less than in previous years.

The Gulf region's dependence on the hydrocarbons sector remains a structural risk factor. Volatile commodity prices could have a significant impact on Gulf economies.

Some restructured loans in Kuwait and the UAE seen as sources of downside risks."We consider that the banks' strong capital levels largely mitigate these risks," said Engin.

The region's traditional strengths -- strong fiscal positions, persistent current account surpluses, and limited dependence on external funding -- are likely to continue to support sovereign creditworthiness and thus sovereign support to the banking sector.

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Publication:Gulf News (United Arab Emirates)
Geographic Code:7UNIT
Date:Feb 3, 2014
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