International rating agency Standard & Poor's Ratings Services said yesterday that it had raised its Banking Industry Country Risk Assessment (Bicra) of four GCC countries.

The agency raised Saudi Arabia to Group 3 from Group 4 and Qatar from Group 5 to Group 4. Both Oman and Bahrain were raised to Group 5 from Group 6. While the UAE and Kuwait are ranked Group 4.

S&P's also affirmed its estimate of the incidence of gross problematic assets in the financial systems of the six GCC countries in an economic recession at 15-30 per cent. These actions in themselves will not automatically lead to upgrades of Gulf banks, but could contribute to case-by-case changes in the ratings, it said.

"These actions primarily reflect an improved industry risk profile in Saudi Arabia, Qatar, Oman, and Bahrain that, combined with strong economic growth, have a positive effect on their banking systems," said Standard & Poor's credit analyst Emmanuel Volland.

GCC banking sectors show a fairly high level of concentration, and competition is relatively limited – except notably in the UAE and Bahrain.

The agency said regional integration remains limited.

Increasing foreign competition is unlikely to dramatically weaken banks' franchises due to the protected nature of most Gulf markets, especially for retail banking where branch networks are needed.

Over a period of time, GCC banks have built up their capital and earnings capacity to the point where they have the strongest financial profiles in the world from a quantitative perspective. Broadly speaking, GCC banks are poised to defend their competitive positions well and maintain their financial strength over the medium term.

It said the Gulf banks' earnings power is very strong although intermediation and the penetration of banking services are lower than those in more mature markets.

Margins remain relatively wide, especially in Saudi Arabia, business volumes are increasing rapidly, the cost of labour is relatively low, and banks do not pay income tax. In addition, the emergence of new banking segments, such as investment banking, private equity, leasing and mortgage lending are likely to improve the quality of revenues.