More challenging operating environment has negatively affected prospects for retail banking in the Gulf Cooperation Council (GCC), Fitch Ratings said in a special report, although the degree of severity will vary. Fitch views the potential risks from retail lending as high in the UAE (particularly Dubai) and Oman, moderate in Bahrain, Kuwait and Qatar, and low in Saudi Arabia. In the report, Fitch noted that total GCC retail loans grew 19 percent to $166 billion. Fitch considers the GCC retail lending market to be untested as rapid growth was from a low base and in previous downturns, retail loans had not been a major part of most banks' risk profiles. “Furthermore, it is during periods of rapid growth that risk management systems may come under stress, lending criteria may not be properly implemented and bad lending decisions made,” said Yousuf Khan, associate director in Fitch's Financial Institutions team. Fitch said the negative impact could be most severe in the UAE, particularly in Dubai. This is because the UAE retail sector is the largest in size ($61 billion) and UAE retail loans grew the quickest (up 46 percent in 9 months of 2008) in the GCC. Fitch considered the Dubai economy to have been most negatively impacted by the global recession in the GCC, and the UAE has an exceptionally high proportion of expatriates, at more than 80 percent of the population (90 percent in Dubai). Expatriate residence visas are nearly always linked to employment in the GCC; rising redundancies are therefore likely to result in higher defaults as expatriates leave. Furthermore, the regulation of retail loans is not as tight in the UAE compared with certain other GCC markets. Risks also appear high for Omani banks as their relative exposure to retail lending is the highest in the GCC, at 38.5 percent of end-2008 banking system loans. In addition, Fitch said the levels of leverage available to retail customers as among the highest in the GCC, and regulation of the retail sector as not as tight compared with certain other GCC states. Fitch further said the negative impact from retail lending as likely to be least severe in Saudi Arabia, where: the market is relatively strictly regulated (partly reflected in a 2.5 percent decline in Saudi retail loans in nine months of 2008); demand is expected to be sustained by a large, growing young indigenous population rather than expatriates; and the local economy has been more insulated from the impact of the global recession than many other GCC states, though declining energy prices will negatively affect the Saudi economy. __
