GCC banks can manage contagion risk from SVB, Signature Bank and Credit Suisse

The UAE and other GCC banks can manage the contagion risk from the collapse of the US-based Silicon Valley Bank (SVB), Signature Bank and troubles at Credit Suisse.

Analysts and economists say that local banks and firms have limited or no exposure and the regional lenders also enjoy the strong support of the governments, which is key for the financial sector and regional economies.

According to global ratings agency S&P, five of the 19 banks it rates in the region have only more than five per cent of their assets in the US, while four had more than five per cent of liabilities to counterparties in the US.

“Generally, GCC banks would have limited lending activity in the US and most of their assets there would be in high-credit quality instruments or with the US Federal Reserve Bank,” S&P said, adding that “GCC banks’ US portfolios have contributed to unrealised losses, but the overall amount appears manageable.”

SVB earlier this month became the biggest American bank to fail since the 2008 financial crisis. State regulators closed New York-based Signature Bank also, becoming the third-largest failure in US banking history.

The Swiss bank Credit Suisse also received a $54-billion lifeline from the government to shore up investor confidence as the collapse of the US banks caused worry among investors about the resilience of the financial system.

In light of the banks’ good funding and liquidity profiles and expected government support in case of need, Mohamed Damak, primary credit analyst at S&P, said the chance of GCC banks having to sell meaningful volumes of investment securities appears limited. “Nevertheless, if they did, and all unrealised losses crystallised, the impact would be on profitability rather than on capitalisation for the majority of rated banks,” he said.

Damak added that GCC banks would need to use only about 24.9 per cent of their 2022 net income, on average, to absorb the estimated revaluation losses.

The Century Financial CIO said the dynamic in the GCC banking sector is solid because the pandemic compelled banks to introspect their cost curve and make significant improvements.