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Resilient Arab banks 'buck financial crisis'.

MANAMA: Banks in the Arab world have been comparatively well insulated from the effects of the recent global financial disruption and ensuing recession, says Moody's Investors Service in a new special comment.

However, Moody's notes that the region's banks continue to face challenges that vary dramatically from one sub-region to another, as reflected in the banks' different risk profiles.

"The main reasons for the resilience of Arab banks to the crisis are the capacity among both conventional and Islamic banks to adapt to macro-economic adversity, their minimal exposures to subprime-related asset classes, government support and sometimes intervention as well as local and regional idiosyncrasies," said Moody's Paris-based vice- president senior credit officer Anouar Hassoune, the author of the report.

The report, entitled "Arab Banks: Shielded Domestic Market Underpin Resilience to Crisis", reviews the key factors that allowed most regional banks to maintain stable creditworthiness during the turmoil.

One key factor is that, with very few exceptions, banks in the Arab world had minimal exposure to subprime related asset classes or structured debt derivatives, and fewer still to troubled global investment banks.

Moody's believes that this is because banks in this region had limited incentives to seek inflated returns abroad when domestic markets offered a far better risk-return trade-off.

The fostering of a largely insulated domestic market in the Arab world was also aided by the supportive - and sometimes interventionist - attitude of regulators and states, but it was also the result of much improved macroeconomic structures within countries, which our sovereign ratings have captured over the past decade.

"However, challenges remain and the current crisis has shed light on the different risk profiles of banks, contributing to the strengthening of some, while weakening others," said Mr Hassoune.

The financial landscape of the Arab world had begun changing before the crisis, but the current environment is forcing faster adjustments.

Moody's believes that banks will not see the benefits of these adjustments in the near term, but rather in the longer run.

Overall, while Moody's maintains a stable outlook on most banking systems in the Arab world, there are three GCC countries on whose banking systems Moody's maintains a negative outlook, namely Bahrain, Kuwait and the UAE.

Bahrain was downgraded in January last year partly because of weakness with an oil price at $45 and the effects of the appreciation of the currency because of the strength of the US dollar.

Copyright 2009 Gulf Daily News

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Publication:Gulf Daily News (Manama, Bahrain)
Date:Jun 15, 2010
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