Speaking at Middle East Credit Outlook for 2006 Seminar in Dubai yesterday, Richard Fox, Senior Director, Sovereign Group, said: “We do not think there is a threat of systemic risk in the UAE and the Middle East for the banking sector arising from the huge stock market losses. Most of the banks in the region are well capitalised and they have made huge profits during the past two years. We estimate the recent losses to be well within manageable limits.”
While assessing the impact of the stock market melt down on other sectors of the economy, he said the impact of negative wealth effect will be reflected on both consumer confidence and private sector's business confidence, but the overall impact on growth will not be significant as public sector investments in huge infrastructure projects are not affected by the stock market.
The banks' credit exposure to the private sector in the UAE and the region are on the rise. The corporate credit quality in the Gulf region according to Fitch is also improving thanks largely to the oil price driven economic boom. Fitch upgraded the ratings of 14 banks in the region recently.
Fitch's views on Gulf banks follows a recent report from Moody's, another international rating agency that cautioned about the ratings sustainability of Gulf banks, in the context of stock market corrections and the seemingly high exposure of banks to stock market linked assets.
“The rating uplift has typically been constrained by our concerns about certain risk pockets relating to the rapid growth in lending and the possible build-up of asset bubbles. Nevertheless, the otherwise favourable Gulf economic and banking environment is reflected in the stable or positive outlooks on all rated banks' financial strength ratings (FSRs),” Moody's Investors Service said in a new special comment last week.
Fitch's latest systemic risk indicators for the banking sector ranks most GCC banks including UAE in category C which implies moderate risk.
In a ranking from 'A' to 'E', ranking 'A' signifies very strong while 'E' means very weak. Fitch uses its Macro Prudential Indicator (MPI) to gauge the banks' credit quality to the private sector on a scale of 1 to 3. While the UAE is ranked C1, Kuwait and Saudi Arabia are ranked B2.
“Growth in profitability of most regional banks are expected to come down this year as the value of their equity linked portfolios have shrunk. But we have seen very few problems in the private sector loan portfolios. However, the full impact will depend of the future direction of the regional markets,” said Philip Smith, Senior Director, Financial Institutions Group, Fitch Ratings.
Fitch analysts said the strong growth in business volumes will continue, however cautioned the banks against deterioration in assets quality due to rapid growth in consumer lending and excessive exposure to real estate linked assets.
On the macro economic front Fitch called on Gulf economies to effectively manage the excess liquidity from oil revenues. “The huge domestic liquidity combined with falling dollar are likely to increase inflationary pressures on the Gulf economies. In the absence of monetary policy tools such as variable interest rates, an active public debt market and lack of flexibility in exchange rates will continue to mount inflationary pressures,” Fox said.Fitch warned the region of asset bubbles due to excess liquidity. While a large portion of the oil revenues are kept within the region, Fitch's data suggests that investments in international securities such as US treasury bills from the region are very low indicating huge liquidity floating around the region that could aggravate both consumer price inflation and asset price inflation.
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