GCC lenders can withstand US contagion risk

Reuters/Brittany Hosea-Small

• Gulf exchanges down following collapse of Silicon Valley Bank
• Share prices improved on Friday as banks manage risk
• Banks market capitalisation held firm despite macroeconomic headwinds

GCC lenders are well equipped to withstand the current crisis in the world’s banking sector, according to experts from ratings agency S&P Global.

The turbulence in the industry over the last seven days – which has seen the high-profile collapse of Silicon Valley Bank (SVB) and Signature Bank in the US, and the bailout of Credit Suisse earlier this week – took another turn on Thursday.

Some of the biggest names in the US banking sector injected $30 billion in deposits into First Republic Bank in a move to stabilise the lender, which had been caught up in the crisis caused by the collapse of SVB and Signature.

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JPMorgan Chase, Citigroup, Bank of America Corp, Wells Fargo, Goldman Sachs and Morgan Stanley were involved in the rescue, said a statement from the banks.

The ripple effect of the ongoing uncertainty has made its way to the Gulf region with all of the GCC exchanges down in the first 15 days of March: Boursa Kuwait (-3.1 percent), Saudi Tadawul (-0.5 percent), Dubai Financial Market (-3.7 percent), Abu Dhabi Exchange (-3.2 percent), Qatar Exchange (-4.3 percent), Bahrain Bourse (-1.7 percent) and Muscat stock exchange (-0.6 percent).

The respective banking and financial sectors from each are also in the red aside from Muscat where there is 1 percent growth in the month-to-date, according to information from Kamco Invest.

Share prices improved on Friday and ratings agency S&P said GCC banks will be able to manage any contagion risk.

Contagion risk is the risk that financial difficulties at one or more banks spill over to a large number of other banks or the financial system as a whole.

In a note on Friday, S&P said: “on average, banks we rate in the GCC had exposure of 4.6 percent of assets and 2.3 percent of liabilities at year-end 2022.”

None of the rated banks have publicly reported any exposure to the two failed US banks.

S&P Global Ratings credit analyst Dr Mohamed Damak said: “It is important to mention that not all unrealised losses relate 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. 

“GCC banks’ US portfolios have contributed to unrealised losses, but the overall amount appears manageable, in our view.”

He added that the chances of GCC banks having to sell meaningful volumes of investment securities “appears limited”.

“If they did – and all unrealised losses crystallised – the impact would be on profitability rather than on capitalisation for the majority of rated banks, in our view,” he said.

Vijay Valecha, chief investment officer at Century Financial, said GCC banks enjoy strong fundamentals with increasing profitability, improving asset credit quality ratios and strengthening capital positioning.

“The market capitalisation of these banks has held firm despite global macroeconomic headwinds,” Valecha said.