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Arab Banks’ Profits Seen to Plunge 40pc

Adnan Ahmed Yousuf, chairman of the Beirut-based Union of Arab Banks (UAB) was quoted by London-based Arabic language newspaper Al Hayat said local banks should take measures to deal with the global financial crisis, including admitting sovereign wealth funds and other long-term shareholders to strengthen financial base and regain investors’ confidence.

“Due to the global economic downturn and its downward impact on oil prices, shelving of some projects in the region, and a liquidity crunch, we expect the profits of Arab banks to decline by 20-40 per cent,” Al Hayat quoted Yousuf. Arab banks, some of which have reported losses from the global crisis, should turn to the local market to avert the complexities of the foreign markets, he said adding that the region has sufficient investment scopes. Bank credit is projected to contract by 10-30 per cent during 2009 after surging by at least 60 per cent in the past few years. Liquidity is also affected by lower foreign capital flow, he said.

In December 2008, Fitch Ratings downgraded the standalone credit rating for 18 banks in the GCC as a result of the deteriorating outlook in the region stemming from the global credit crunch.

The downgrades come as Fitch released a new report, which assesses the growing impact of the global credit crisis on GCC financial institutions.

Most GCC banks’ Issuer Default Ratings (IDRs) remain driven by Fitchs view of the probability of support from the respective sovereign authorities, and most of these have been affirmed by Fitch.

However, Fitch’s view of the standalone financial strength of many GCC financial institutions, reflected in the individual rating, has changed as the impact of the global economic crisis spreads into the region.

“Fitchs outlook for GCC banks has become less favourable as it has become evident that the regions banks and financial institutions will not be able to fully insulate themselves from the global credit crisis,” said Fitchs Financial Institutions Dubai-based director Robert Thursfield.

“GCC banks are now feeling the effects of the crisis, which is likely to cause deterioration in banking sector profitability and capitalisation going forward.”

However, according to Washington-based Institute of International Finance (IIF), Gulf-based banks could escape the impact of the global financial crisis and are unlikely to suffer from any collapse due to strong government support.

IIF said in a study that despite the plunge in oil prices, the six GCC states have enormous budget and current account surpluses which leave them in a position to intervene and prevent the collapse of key regional banks.

“There are no signs, so far, that the sharp fall in equity prices in the Gulf has affected the soundness of financial institutions, owing to high solvency ratios. We believe the respective authorities in the GCC states will not let any major local bank collapse,” the study said.

According to UAB data, Arab banks recorded strong performance in 2007, with their combined assets surging from $1,268 billion at the end of 2006 to a record $1,691 billion, an increase of about 33 per cent.

According to national data, the UAE controlled the largest assets in the region at the end of 2007, standing at around $335 billion, nearly 20 per cent of the total Arab assets.

· issacjohn@khaleejtimes.com