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Can GCC banks remain resilient from the global banking crisis?

According to ratings agency S&P, the impact of the bankruptcies is likely to be limited.

Can GCC banks remain resilient from the global banking crisis?
[Source photo: Anvita Gupta/Fast Company Middle East]

With the collapse of two major banks in the US, Silicon Valley Bank (SVB) and Signature Bank (SB), as well as issues with Credit Suisse in the past few days, one may wonder about its impact in the GCC region. 

However, according to a recent report from rating agency S&P, the impact of bankruptcies is likely to be limited and can manage any contagion risk from the bank failures. This is due to the regional lenders’ US exposure being lower than 5% of total assets. The banks also have good funding and liquidity profiles and can receive government support if needed.

S&P also pointed out that out of the 19 banks that it rated, only five have more than 5% of their assets in the US, while four banks have more than 5% liabilities to counterparts in the US. As of last year, the rated banks’ exposure was pegged at 4.6% of assets and 2.3% of liabilities. 

S&P Global Ratings credit analyst Dr. Mohamed Damak said, “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.”

On how much-unrealized losses have banks amassed, and whether they are manageable, Dr. Damak noted, “It is important to mention that not all unrealized losses related to exposures in the US. Rather, they are associated with banks’ overall investments, including instruments in the GCC whose fair value declined as the region’s central banks increased their rates.”

With the GCC banks’ good funding, liquidity profiles, and expected government support, S&P indicated that the overall amount still looks manageable. However, if the unrealized losses crystallized, the impact would be on profitability rather than on capitalization for the majority of major banks. 

This is also echoed by Moody’s Investors Service, which stated that banks in the GCC region are strongly interlinked with their respective sovereigns and remain unaffected. This is due to the GCC banks’ broad franchises and large government presence across the banks’ balance sheets. It also noted that banks in the GCC often have large franchises in retail and corporate banking. Plus, governments in the region are primarily noted across the balance sheets of banks as principal shareholders, borrowers and depositors, thereby encouraging an interconnected operating environment.

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