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Dubai: The exposure of Gulf banks to the US subprime mortgage crisis is limited, however, it appears that some banks are hiding their losses, said Emmanuel Volland, director of financial services with Standard & Poor's.
"Transparency and quality of disclosures are still a big problem with some GCC banks and to that extent the information on the exact nature of exposure is limited. However, a few banks have recently acknowledged subprime related losses and there could be a few still hiding their exposure," said Volland.
In August last year, S&P did a survey of banks it rates in the region and concluded that the losses could be less than one per cent of the total assets. However, a further deterioration in the values of subprime assets in the fourth quarter of last year has resulted in the valuations of investment portfolios of some of these banks dipping further.
Collateralised debt
Problems of most banks came from collateralised debt obligations (CDOs). These securities are created when pools of debt, some of them tied to subprime mortgages, are sliced into pieces carrying different levels of risk and return, and then sold to investors.
Although regional central banks have insisted in the past that Gulf banks are insulated from the subprime losses, the substantial decline in the US residential mortgage-backed securities (RMBS) and structured investment vehicles (SIVs) have put pressure on the bottomlines of a number of regional banks.
This month, Arab Banking Corporation and Abu Dhabi Commercial Bank reported declines in profits due to portfolio declines linked to US and western markets. ABC made Dh840 million worth of provisions and ADCB made a general provision of Dh560 million.
In December international rating agency Moody's warned of a few Gulf banks being affected by the US subprime related losses. In a rating revision Moody's changed the outlook on Gulf International Bank's (GIB) A2/Prime-1 deposit ratings and A3 subordinated debt ratings of GIB to negative from stable.
Loan portfolio
Apart from the portfolio losses, rating agencies are concerned about the bulging retail loan portfolios of Gulf banks. Retail loans have been growing rapidly in the region over the past three years.
According to UAE Central Bank statistics, retail loans in the UAE surged almost 40 per cent in 2007 while most Gulf countries reported retail lending growth in the range of 20 to 40 per cent.
"The retail loan growth has been supporting the financial performance of banks. However, these loans are untested by sharp economic downturn and could exacerbate asset quality problems under stress conditions," said Mohammad Damak, an analyst with S&P.
According to S&P, the asset quality of the rated banks continued to remain strong. In the first half of last year the overall non performing loans (NPLs) declined to two per cent compared with 2.3 per cent at the end of 2006. However, it warned that the NPLs could deteriorate should economic conditions decline.
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