DUBAI - Gulf Arab banks may still face an increase in bad loans but tests show a large capital injections may be needed only if volumes of bad loans rise sharply, an official at the International Monetary Fund said on Tuesday.
The global credit crunch sent shockwaves through the world's top oil producing region, piercing an asset price bubble, which froze lending, squeezed liquidity and sent key economies Saudi Arabia and the United Arab Emirates into a downturn this year.
Masood Ahmed, the IMF director for Middle East and Central Asia, said some banks in the Gulf Cooperation Council region, which also includes Kuwait, Qatar, Oman and Bahrain, may still need to be recapitalised in the future to cope with bad loans.
"The fact that they (non-performing loans) have not quite deteriorated is not a reason that they won't deteriorate a bit more," Ahmed told an economic forum.
"The stress testing we were doing, working with authorities in different countries of the banking system, suggest it would take a very large increase in non-performing loans before the need arises for a significant bank recapitalisation."
Banks across the Gulf Arab region have had to take provisions for their exposure to Saad and Ahmad Hamad Algosaibi and Bros Co, two Saudi conglomerates that are in the middle of debt restructuring, with some bankers warning the total cost of writedowns may hit $22 billion and affect around 120 banks.
The ratio of non-performing loans to total gross loans ranged between 1.2 and 3.1 in the Gulf at end-2008, while the ratio of provisions to low quality credit stood between 83.2 in Qatar to 153.3 in Saudi Arabia, the IMF report said.
In contrast, the averages for emerging Europe were 6.5 and 58.5, respectively.
"The non-performing loans went up across the whole of EMEA pretty sharply," said Caroline Grady, economist at Deutsche Bank in London.
"And if you think about the collapse you have seen in the real estate in the UAE and other parts of the Gulf you would expect that you are going to see NPLs going up across the region and you have not seen it in the numbers as yet," she said.
Simon Cooper, the head of HSBC Middle East, the largest foreign bank in the UAE, told the Reuters Middle East Investment Summit on Monday the trend in non-performing loans should hold steady in the next six months.
Ahmed also echoed his comments earlier this month, saying the Gulf Arab banks are in a reasonable shape with impacts of the global crisis contained, but deleveraging remained a priority for the coming year.
"The latest numbers on different measures of bank profitability and financial soundness ... show the banking sectors are in a reasonable shape overall," he said.
The IMF said in a report earlier this month capital adequacy ratios ranged from 13.3 in the UAE to 18.1 in Bahrain, compared with 15.8 in emerging Europe at the end of 20.