Middle East turmoil gives banks a break

While the unrest in the region has thrown up obstacles, there are also opportunities. Gulf banks are likely to play a central role in financing the expected wave of development that follows political reform - with video.

Political unrest in countries such as Egypt can represent opportunities for regional lenders.
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The unrest across the Middle East has thrown up new obstacles for regional banks just beginning to recover from the financial downturn.

But analysts point out the turmoil also comes with its share of opportunities for lenders.

The risks, at least, are clear. Already in Egypt, Tunisia, Jordan, Bahrain and other countries where mass protests flared, credit ratings agencies have downgraded dozens of banks in moves that could worry depositors, raise financing costs and cast fresh doubt on the stability of the financial system.

Moody's Investors Service, for example, lowered the ratings of five Tunisian banks just days after the former president, Zine el Abidine Ben Ali, bowed to popular pressure and fled the country on January 14.

Using the same logic cited by the other two major global ratings agencies, Moody's said it made the move because of its "reassessment of the country's capacity to support its banking system" in light of its earlier downgrading of Tunisia's government ratings.

Adding to the trouble, regional bank stocks have not fared well during the political strife, potentially crimping their access to capital from equity investors.

Projecting that economies in crisis-hit parts of the region could take a long time to pick up again, some analysts have also begun advising investors to sell.

Alembic HC Securities, a research house and brokerage in Dubai, responded by cutting recommendations on all five Egyptian banks it covers.

And if the turmoil forces companies to delay major expenditures and leads to a general decline in economic activity, banks are likely to suffer. For a sector where profits largely rely on the appetite for financing and investment, economic stagnation would be unwelcome.

"Generally speaking, uncertainty and volatility are always bad for banks in the short term as it results in lower investment and less activity," says Raj Madha, a banking analyst at Rasmala in Dubai.

The news, however, may not be all bad for banks - especially those in the Gulf, which has seen less unrest than the populous Arab countries of North Africa.

While the region's future is far from certain, Gulf banks could play a central role in financing an expected wave of development that emerges from political reform.

"If this ultimately leads to a stable, more open economy, then the longer-term opportunity for regional banks becomes enormous," Mr Madha says. "Banks are key facilitators of investment, and should therefore be beneficiaries of resurgent private and public sector foreign direct investment."

Jaap Meijer, a banking analyst at Alembic HC, says the negative impact of the recent turmoil on Gulf banks was also softened by the stimulative effect of high oil prices. The high prices have prompted more robust government spending in the GCC, which Mr Meijer says is likely to trickle down to banks that give loans to contractors and other companies involved in new projects.

"We think banks in Qatar, particularly Qatar National Bank and Qatar Islamic Bank, are well positioned to benefit from long-term investment plans," he says. "In the UAE, we think National Bank of Abu Dhabi, First Gulf Bank and Abu Dhabi Islamic Bank are best positioned."

Another potential positive for the Gulf's banks could be an influx of money from depositors in less stable countries.

It is not yet clear to what extent people in such countries have transferred money out, but there is some speculation that Gulf banks could be the main beneficiaries.

The money flow question is a difficult one, Mr Madha says. Foreign investors and wealthy local investors would probably be tempted to move money out of troubled parts of the region.

At the same time, most well-heeled investors from the region would probably already have much of their wealth invested outside of their home countries, muting the benefit on deposit growth for Gulf banks.

In any case, a large inflow into the banking system "would not be terribly beneficial", Mr Madha says, because it would only be short term.

But Mr Meijer is predicting "some positive impact on the outstanding deposits of the strongest banks in Qatar and the UAE".