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Gulf banks set fair for 2013

Gulf banks set fair for 2013 Anthony Harrington

Two reports on the state of the banking sector in the Gulf Cooperation Council (GCC), one from the ratings agency, Standard & Poor's in July 2012 and the other from Deutsche Bank Research (DBR) in November 2012,  both see the region's banks as being in considerably better shape than their European or US peers. S&P looked at 26 Gulf banks and found that they were in much better shape to withstand any further shocks, since their risk-adjusted capital ratios were some five percentage points higher, on average than the 100 largest global banks covered by S&P. As such, the agency argued, Gulf banks look to be relatively immune to any further turmoil coming out of the European crisis. That is a fairly bold statement, since if the euro actually went smash there is probably nowhere on the planet that wouldn't feel the shock or see a fairly dramatic setback in profits. However, one takes the point.

The DBR report is wider in scope, looking at the financial markets as a whole in the GCC. As the authors note, countries in the region have put a high priority in recent years in building up their financial markets expertise and institutions. In DBR’s view, the GCC, which includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, has “a solid chance” of succeeding in creating 21st century institutions to rival those in the west. One of the things they have going for them, DBR points out, is a more resilient set of economic conditions to that pertaining in Europe and the US. However, the region is not without its challenges.

“Low market liquidity, large price swings, funding issues in prominent state-owned enterprises and a cooling sentiment for risk are obstacles to faster financial development,” the report says.

And this is without the uncertainties trailing in the wake of the Arab Spring or the threat of extremism.

Part of the problem is simply one of scale. At below 1% of global assets the region’s financial markets lag a good distance behind their potential, and established players have sharp elbows and are not going to concede ground to any newbie player easily. If it wants to progress these markets the GCC is going to have to take a number of structural steps, the report argues.

In particular GCC governments are going to have to find ways of strengthening the competitiveness of domestic banking markets; of broadening and deepening local equity markets and of promoting efficient corporate debt markets. Given the strong bias towards Shari’ah compliant financing throughout the Muslim world, the GCC is going to have to develop and promote Shari’ah compliant financing as what the report terms “a competitive market pillar. It is also going to have to winch a derivatives market into life without falling into the same excesses and elephant traps, if possible, that leading bankers in the West fell into en route to the global financial crash of 2008. Finally, the GCC is also going to have to find ways of stimulating private institutional investment.

Another dilemma for the GCC is to decide how far it wants to follow and emulate the G20 countries in implementing new international market and regulatory initiatives. So far the commitment from the GCC has been very positive along these lines but the DBR report suggests that the GCC economies are going to have to intensify their commitment and move to full participation in the reform process. (The temptation for the region has to be to fudge some of the reforms and introduce a softer version in the hope of attracting branches of Western banks to set up there, effectively benefitting from regulatory arbitrage. While the GCC has not gone down this road yet, the possibility continues to remain open.

Further reading on derivatives and bank regulation

Tags: derivatives , Deutsche Bank Research , GCC , Gulf banks , Gulf Cooperation Council , Muslim , S&P , Standard & Poor's
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