Capitalisation key to lift Gulf banks ratings: S&P
30 Oct 2017 - 0:31
Capitalisation continues to be a positive rating factor for banks in the Gulf Cooperation Council countries, S&P Global Ratings said yesterday.
After completing S&P’s latest tally of GCC banks’ risk-adjusted capital (RAC) ratios, based on their year-end 2016 financial disclosures and our own parameters as of October. 16, 2017, the ratings agency calculate an unweighted average ratio of 11.5 percent for the Gulf banks. Looking ahead, S&P expects their RAC ratios to remain relatively stable in the next 12-24 months.
“This result underpins our strong or very strong assessments of capital and earnings for 72 percent of the Gulf banks we rate,” said S&P Global Ratings credit analyst Mohamed Damak in the report published yesterday, “Capitalization At Gulf Banks Is One Of The Main Strengths Supporting Their Ratings.” Their quality of capital remains strong, even though we have observed higher recourse to hybrid instruments over the past few years.”
At year-end 2016, eligible hybrid instruments represented on average 9 percent of the banks’ total adjusted capital, TAC, S&P’s base measure of capital. Credit risk and particularly exposure to corporates dominates the ratings agency’s calculation of their risk-weighted assets. Finally, its adjusted RAC ratio highlights single-name and geographic concentration as additional risk factors. “It is important to mention that the 11.5 percent average RAC ratio as of year-end 2016 masks significant disparities among rated banks, ranging from 5.3 percent to 17.0 percent,” said Damak.
According to S&P, the rated banks based in Qatar, the United Arab Emirates and Saudi Arabia enjoy the highest capitalisation while the weakest capitalization, but still adequate, is for rated Bahraini banks. The average capitalization for Bahraini banks and some Kuwaiti banks is weighed down by their exposures to riskier countries such as Turkey and others in the Middle East.
“Compared with local regulatory requirements, our RAC ratios are lower primarily because we apply more conservative risk weights on most asset classes, including sovereign exposures,” Damak said. The average Tier 1 capital ratio for rated banks according to local regulatory measures reached 16.3 percent at year-end 2016.