JEDDAH – Last year, banks in the Gulf Cooperation Council (GCC) were able to capitalize on investors' global search for higher yields, and their issuance volumes were substantially higher than in 2011. In an article published Monday titled “Low Interest Rates Should Keep Gulf Banks' Debt Issuance Levels Strong In 2013,” Standard & Poor's Ratings Services gives reasons why it expects Gulf banks' issuance levels to remain high this year. “We noted a sharp rebound in Gulf banks' activity in debt capital markets in 2012 as they took the opportunity to issue long-term debt at healthy prices under the favorable market conditions,” said Standard & Poor's credit analyst Timucin Engin. “Given the interest from institutional investors, the banks' rapid growth, and the supportive environment for issuing long-term debt instruments at low cost, we think Gulf banks will have another busy issuance year.” We expect most of the impetus to come from banks in the United Arab Emirates, the largest issuers in 2012, and Qatar, where issuance has been steadily increasing. As Gulf banks look to diversify their funding base, sukuk is becoming more important in the GCC's fixed-income market, representing almost half of Gulf banks' issuance in 2011 and 2012. “Sukuk is becoming a key component of Gulf banks' funding bases,” Engin said. “About 50 percent of banks' debt issued in 2011 and 45 percent in 2012 was in the form of sukuk. Last year, banks issued $6.7 billion of sukuk, representing year-over-year growth of 136 perceent. More important, conventional banks are now increasingly participating in the sukuk market as a means of diversifying their funding bases with longer-term instruments. The demand for sharia-compliant products is rising, both regionally and internationally.” The demand for Shariah-compliant products is rising, both regionally and internationally. In 2011, conventional lenders Abu Dhabi Commercial Bank, HSBC Middle East, and First Gulf Bank issued a combined $1.65 billion of sukuk, 59 percent of all sukuk issuance in the market. Last year, sukuk issuance by conventional lenders increased to $2.7 billion, or about 41 percent of total issuance. Another development in 2012 was the use of hybrid sukuk structures. Banque Saudi Fransi raised funds in the markets twice last year, issuing a total of $1.3 billion, of which $506.6 million was in the form of Tier 2 subordinated sukuk. Similarly, Saudi British Bank issued $400 million of Tier 2 subordinated sukuk in 2012, and Abu Dhabi Islamic Bank made its debut Tier 1 debt issuance of $1 billion of perpetual sukuk, which was also the first from a Gulf bank. The GCC's largest banks in the UAE have traditionally accounted for a large proportion of debt issuances in the Gulf region. More than 60 percent of Gulf banks' issuance between 2007 and 2012 emanated from the UAE. The UAE has the largest banking system in the region, and the amount of debt UAE banks issued increased by 53 percent in 2012 to reach $8 billion, or about 54 percent of total issuance reported in the Gulf region. In Qatar, the level of bank issuances, albeit volatile, is rising alongside the country's high-paced credit growth, a trend we believe is here to stay. Although we expect credit growth in the UAE to remain limited in 2013, as it did in 2012, we believe the level of issuances will remain strong, primarily because of banks' efforts to reduce funding costs by paying down higher-cost debt issued in 2008 and 2009. We also expect that banks will continue to use the debt capital markets, given the opportunity to secure long-term funds at low cost. As part of its efforts to strengthen liquidity in the system during the global financial crisis, the UAE's Ministry of Finance pumped liquidity into the UAE's banking system in 2008. One of its measures that year was to inject AED 50 billion (about $13.6 billion) of deposits into the country's banks. The banks were later given the opportunity to convert these deposits into seven-year subordinated loans, and they converted almost the entire amount in 2009. These loans qualify as Tier II subordinated loan capital for the first two years, after which they amortize at the rate of 20 percent per annum until they mature on Dec. 31, 2016. The interest rate is 4 percent for the first and second year, 4.5 percent for the third year, 5 percent for the fourth year, and 5.25 percent for the last three years, and these loans allow banks the option of early repayment. Banks were eager to take up these facilities during the financial crisis because they needed the liquidity and additional capital cushion, S&P said. However, with limited credit growth since 2009, banks' overall funding and liquidity profiles have visibly improved. Similarly, capitalization in the system has increased, despite lower-than-average earnings stemming from higher credit losses. – SG
