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The turmoil in the American banking sector that has sparked alarm across the markets is likely to have a limited impact on most lenders in the Gulf Cooperation Council (GCC) region, according to ratings agency S&P.
Two major banks in the US, Silicon Valley Bank (SVB) and Signature Bank (SB), collapsed over the weekend. The crisis, which has been linked to tech and crypto sectors, has fueled fears of a wider meltdown in the banking industry.
In its new analysis, S&P noted that the majority of GCC banks can manage any contagion risk from the bank failures, citing that the regional lenders’ US exposure is lower than 5% of total assets. Besides, the banks also have good funding and liquidity profiles and are expected to receive government support “in case of need”.
Out of the 19 banks that S&P rate, only five have more than 5% of their assets in the US, while four banks have more than 5% of liabilities to counterparts in the US. As of the end of last year, the rated banks’ exposure was pegged at 4.6% of assets and 2.3% of liabilities.
“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,” S&P said.
Unrealised losses
Looking at the GCC banks’ unrealised losses, S&P indicated there is no cause for concern, citing that revaluation reserves averaged negative 2.6% of total equity at the end of 2022. Among lenders that have the highest unrealised losses, the ratio was still only -10.9%.
“The slightly positive outcome of up to 1.9% for a handful of banks stemmed mainly from hedging exposure against interest rate volatility,” S&P said.
“It is also important to mention that not all unrealised 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.”
While the US assets of the region’s lenders have contributed to unrealised losses, S&P said the overall amount still looks “manageable”.
However, if the unrealised losses “crystallize”, S&P said there is a limited chance that GCC banks will end up selling significant volumes of investment securities.
“If they did, and all unrealised losses crystallised, the impact would be on profitability rather than o capitalisation for the majority of rated banks,” the ratings agency said.
The recent bank failures have sparked fears that the wider financial system could be at risk, prompting the US government to step in and assure depositors that their deposits are safe. One of the banks that failed, SVB, was popular among companies in the tech industry, as well as venture capitalists in Silicon Valley.
(Reporting by Cleofe Maceda; editing by Seban Scaria )
