The banking sector in Saudi Arabia is the most stable in the emerging economies, offering the lowest risk, a study released by Global Insight on Saturday said. In general terms, the Cooperation Council (GCC) countries exhibit high levels of banking sector stability, in sharp contrast to emerging economies outside that group, according to Global Insight's Banking Risk Service report. The report said the global financial crisis has had relatively limited direct effect on banking stability in most emerging markets thus far. However, pressures are starting to mount and the outlook has turned negative for the banking sectors in a number of major emerging economies. For the GCC countries presently under coverage, Saudi Arabia and United Arab Emirates banking sectors are rated as stable and as highly stable. Global Insight said “we looked at 33 emerging markets and found that credit expansion in many of these economies has been very rapid over the past several years, driven in large part by strong economic growth.” Nonetheless, in many cases, the rapidity of this credit growth has led to questionable credit risk assessment practices and asset price inflation,” said Toby Wight, manager of Global Insight's Banking Risk Service. He added “these risks are compounded, in many instances, by high levels of non-performing loans, poor financial sector regulation, and the limited extent of economic reforms, all of which have further negative implications for bank stability. The degree to which this occurs will vary greatly by country, but banking sectors in general will be exposed to increased stress and risk of instability in the near term.” Saudi Arabia is followed by Taiwan, United Arab Emirates, and Malaysia. In these countries, capital levels are high, liquidity is sufficient, bank management is adequate, and the regulatory environment is prudent. “Our strong rating for these countries carries a stable outlook with no significant deterioration of their present status expected in the near-term,” it added. Saudi banks confirmed in individual statements early this week that they have not been affected by the mortgage crisis days after the biggest loss the stock market had witnessed.The Kingdom's attractive environment had drawn a number of international players in the past two years such as Merrill Lynch, Deutsche Bank and JPMorgan which have acquired licenses to open offices. Hamad Saud Al-Sayyari, Saudi Arabia's central bank governor stressed earlier that there was no scarcity in liquidity in the Kingdom and Saudi banks were in a good position to weather a global downturn. “Figures point to strong growth in loans, money supply, banks have liquidity, additional deposits. There is no scarcity in liquidity,” he said. On the contrary, Venezuela, Iran, and Nigeria were the top three among the “Highest Risk Countries” in the “Banking Sector Risk Rankings for 33 Emerging Markets”, Global Insight said, noting that these countries have “the highest risk of systemic banking sector instability.” The banking sectors in these countries “suffer from strong political influence and unfavorable economic policies,” the report added. In the case of Iran and Venezuela, the high level of state ownership by a financially secure sovereign government brings some stability, but financially unsound lending practices are prevalent. Capital levels are relatively strong in Nigeria, but the inadequate capitalization of banks in Iran and Venezuela provide much less cushion against potential negative shocks, the report further said. The two banking sectors under coverage for sub-Saharan Africa, Nigeria and South Africa, vary greatly. The South African banking system is sophisticated and is rated quite stable, with a low risk of crisis. It is well capitalized, well regulated, and supervisory practices are largely in compliance with international standards. “The Nigerian banking sector, however, is rated as one of the most unstable. It is plagued by a legacy of weak corporate governance, along with poor accounting and disclosure practices resulting in poor and unreliable data.” Rapid credit growth is a significant risk factor in both countries, with household debt service capability becoming a concern due to increasing interest rates. Across Asia, meanwhile, banking sectors exhibit wide divergences in their risk levels. The outlook for China, Vietnam, India, and Pakistan is negative, due to the high potential for loan defaults to increase in the near term. “We have substantial concerns about the Chinese and Vietnamese banking sectors, as excessive political influence and poor risk assessment and banking practices create high potential for instability,” it said. This is somewhat mitigated by their high level of government ownership, and the strong financial positions of their sovereigns. India and Pakistan have moderate levels of instability stemming primarily from inadequate credit risk assessment capabilities and banking practices. Additional risks stem from the relatively recent liberalization and privatization of the Pakistani banking sector and the upcoming prospect for such liberalization in India. Other Southeast Asian countries are generally more stable, with either “neutral or positive near-term outlooks,” the Global Insight report said. In CIS and Eastern Europe, however, the countries most at risk are Hungary, Kazakhstan, and Ukraine, where foreign currency borrowing by banks and on-lending to unhedged domestic customers have been very high, resulting in higher funding costs and serious foreign exchange risks to banks. These risks are intensified by high levels of non-performing loans, poor financial sector regulation, and the limited extent of economic reforms, all of which have further negative implications for bank stability. Levels of capital adequacy vary widely throughout the region, but banks in many countries are vulnerable to potential liquidity shortfalls. Among the stronger countries in Eastern Europe – notably Slovakia, the Czech Republic, and Poland – foreign currency lending has been more restrained, non-performing loans are relatively low, and the prospects for stability are greater, the report said. Financial sector regulation in these countries is generally more effective than elsewhere in the region, it added. Global Insight's banking sector risk ratings are designed to complement country-level macro-economic risk assessment and ratings of individual banks and other financial institutions. __
