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6| pfi | Middle East Report 2010 GCC banks

The system is in decent enough health to manage what is ahead.

of further losses being incurred. Although each market is different, prices are not expected to recover in 2010 and the drop could extend as far as 2012. This will push up the ratio of NPLs and force banks into additional provisions. There is also the unknown problem, which appears from nowhere to inflict damage on one or a number of banks. Gulf Bank was an example of this. It was forced into an emergency recapitalisation after a client defaulted on KD375m (US$1.4bn) of losses from currency derivatives trading in October 2008. Other episodes like this are not impossible to imagine and could do significant harm. However, while all these problems could have an impact on individual banks’ balance sheets, do they have the potential to cause a significant shock to the region’s banking system? The answer, on the whole, is probably not. The events listed above have already been flagged and banks will have taken sufficient measures to counteract their potential effects.

Their progress is also being tracked by regulators, who are managing the impacts on the wider system. Even in regards to unknown shocks, the heightened risk envi- ronment should mean that possible eventualities have been tested by banks and regulators. Therefore, the pos- sibility of an event that shakes a banking system – be it at a state or regional level – is unlikely.

Riding out the shocks

This means that attention should be focused on the abil- ity of individual banks to ride out shocks. Yes, there are needs for regulatory reforms, which would help guard against future shocks; especially in Kuwait. However, this should be the focus for the medium-term. The more press- ing need is to ensure banks are in a position to handle the immediate future and the current environment. The need for governments to implement system-wide interventions – whether they are preventative, like in Qatar, or to tackle a specific threat, like in the UAE – should be behind us. Some question marks have been

raised over whether banks in the UAE, in particular Dubai banks, could get more state assistance to help man- age losses against loans. Shuaa Capital, in its “UAE Banks Put To The Test” report, stated that while the banks it looked at had suf- ficient capital, some would need up to Dh15.8bn of cap- ital injections to ensure they met the UAE Central Bank’s regulatory requirements in all scenarios; with the gov- ernment a possible source for this capital. However, others have argued that the government is unlikely to want to intervene directly in the system again. Despite this, there could be some government role in recapitalisations as many hold stakes in banks and these insti- tutions could decide to tap shareholders for equity. We have already seen a number of Kuwaiti banks either announce plans for, or have already held, rights issues; on the back of stress tests ordered by the Central Bank of Kuwait. There has also been talk of capital calls in Bahrain, where Ithmaar Bank and Gulf Finance House have already com- pleted issues, and the UAE. Most of the rights issues so far have been aimed at rebuilding balance sheets and capital adequacy ratios and this is likely to be the case for the time being. There could also be future issues to fund the expansion of businesses, although these are likely to be a long way off as most banks, with the exception of Saudi Arabia, are still adopting cautious lending practices and loan growth is either flat or negative. When loan growth starts to turn, banks will want to maintain the higher capital ratios, so a rights issue could be used to the way to achieve this. So, while steering clear of sweeping generalisations, the one thing that can be said about the state of the GCC bank- ing system is that it is in decent enough health to man- age what is ahead. The system has had to deal with unprecedented turmoil but, despite a few hiccups, it has come out the other side intact. However, while the sys- tem is still in place, it is now up to individual banks to ensure they remain part of it, as any future problems will be isolated within a limited number of institutions.

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