GCC banks' capital to remain high

Capitalisation exceeds their global peers, says S&P

Banks in the Gulf Cooperation Council (GCC) region have capitalisation that generally exceeds their international peers, said Standard & Poor's Ratings Services in its report "Gulf Banks' Capital Positions Compare Well With Those Of Global Banks," published today.

“Our risk-adjusted capital (RAC) framework, which we use to measure banks' capital adequacy, indicates that the average RAC ratio for GCC banks stood in the 12 to 13 per cent range as of end-December 2011 - about 5 percentage points higher than the 7.4 per cent average we projected for the 100 largest banks we rate in September 2011.

"We believe there are two primary factors underlying GCC banks strong capitalization metrics," says Standard & Poor's credit analyst Paul-Henri Pruvost.

"First, banks in all GCC countries, except Saudi Arabia, must maintain regulatory capital adequacy ratios above 10 per cent. In addition, GCC banks tend to operate with substantial headroom ranging from 3 per cent to 23 per cent for the banks we rate," added Pruvost.

While GCC banks tend to outdo their larger international peers in terms of capitalization, they have weaker risk positions. Their risk profiles include sizable single-name, sector, and geographic concentration in countries that have higher economic risk than more mature markets in Western Europe or North America.

Still, these risks aren't sufficient to threaten their capital positions, which we expect will remain broadly stable over the next two years. This is because we forecast subdued growth in risky assets, particularly corporate financing, combined with a gradual recovery in internal capital generation thanks to reduced impairment charges.

“Our expectations for GCC banks reflect this: 21 of the 26 GCC banks we rate have stable outlooks,” the agency said in a statement today.