CREDIT ratings agencies are expanding their coverage of the Gulf and bombarding the banks of the region with ratings. Driven by demand for information from their subscribers abroad, no fewer than four big agencies have moved into an area that was previously served by just one. Yet, the response to their arrival has been mixed and not all the banks that are receiving attention are keen to be put under the microscope.
Moody’s Investors Service, one of the world’s top agencies. is the most active of the newcomers to the Gulf. But in a market where discretion is appreciated, Moody’s has drawn criticism for its energetic approach to assessing the financial health of banks and governments. The other new arrivals – Standard and Poors (S&P) and Thomson BankWatch of the US and European agency IBCA – are moving more cautiously.
The big agencies’ expansion in the Gulf comes in the context of rising international interest in emerging markets. Despite such explanations for the sudden flurry of interest some local bankers question the extent to which the Gulf’s cash-rich banks actually need credit ratings at the moment. Others observe that the central banks of the region seem to broadly favour the process and they see potential advantages for banks that do secure a rating.
Before this year, only a few big Arab banks had ratings from the US agencies or IBCA. Most Middle Eastern banks were rated by Capital Intelligence, an agency based in Cyprus which has been active in the region since the early 1980s and also covers south and east Asia. This picture has changed beyond recognition in recent months, with many of the bigger banks in the Gulf states receiving ratings from one or other of the Western agencies:
Moody’s has assigned sovereign ceilings for bank deposits in all six Gulf Arab states and given ratings for deposits and financial strength to four banks in the UAE, four in Oman, three in Qatar, two in Babrain and four in Kuwait – including one Islamic bank.
IBCA has rated Kuwait and two Kuwaiti banks. The European agency is also a partner in a joint venture, the Inter-Arab Ratings Company (IARC), which plans to invest in local Arab ratings agencies and to set up offices in the Gulf, the Maghreb and the Levant this year (MEED 29:3:96).
S&P has assigned sovereign ratings to Qatar and Oman, published a report on Saudi banking and prepared another on UAE banks.
Thomson BankWatch (TBW) has assigned a sovereign rating to Qatar and rated three Saudi and two Qatari banks this year. The agency, which also rated four Turkish banks in May, aims to have covered 15 to 20 institutions in the Gulf and the Mediterranean by the end of this year.
Moody’s makes its mark
Moody’s has been the most active of the agencies coming into the Gulf, and it has ruffled feathers in some places. Some bankers feel that the US agency gave banks unfairly low marks for its bank financial strength rating (BFSR). The BFSR, which is designed for banks in emerging markets, ‘reflects the bank’s strength on a stand-alone basis and the likelihood that it might require support from a third party in the future,’ according to Moody’s guidelines.
‘Moody’s decided to give unsolicited ratings, then invited banks and governments to co-operate. Some were interested and some were not,’ says one UAE-based banker. He notes that in the UAE, no bank scored a BFSR higher than D-plus. In the Gulf as a whole, the only bank to get a better grade was National Bank of Kuwait with a C-plus.
This is a long way down the BSFR scale which starts at A, and some bankers wonder whether Moody’s does not have too pessimistic a view of the possible risks within the Gulf’s banking systems. ‘We’re unsure of the logic of the BFSR,’ the UAE banker says, voicing a view echoed by others.
‘People understand the headline ratings, but they wonder why such liquid institutions get a D-plus when some in the Philippines get a C-rating. It’s hard to understand the comparability.’ ‘There is a general impression that Moody’s didn’t fully understand the scene in the Gulf. The other rating agencies seem to have a better understanding,’ says Mohannad Farouky, assistant general manager at Gulf International Bank (GIB) in Bahrain, which was not rated by Moody’s.
Moody’s also caused controversy with its sovereign credit ratings for the six Gulf Arab states. These ratings measure ‘transfer risk’ which is the risk that institutions in a country will be unable to meet foreign currency obligations by factors beyond their control. This might be due to government exchange controls, for example. Before an agency can give a bank a rating which applies internationally, it must set a sovereign ceiling.
Some bankers felt that the Moody’s sovereign ratings for the Gulf states, issued in late January, were too low – Qatar and Bahrain were below investment grade while Saudi Arabia was only just above the line.
When S&P rated Qatar and Oman in February, it gave both states comparatively higher grades. One key difference was that S&P had the co-operation of the states concerned while Moody’s did not.
Moody’s stands by its judgements nevertheless. ‘We believe that the ratings that have been set for the Gulf states capture transfer risk fairly and there is no reason for concern over whether or not they were established with or without government cooperation,’ says Elisabeth Jackson-Moore of Moody’s Interbank Credit Service, which is based in Cyprus.
‘Ratings are a reflection of our opinion,’ she adds. ‘It is almost inevitable that there may be other opinions in the market that may have been arrived at as the result of valid argument.’ It is perhaps not surprising that banks should want the best possible rating or that Moody’s, which has also drawn criticism in Japan and the US for issuing unsolicited ratings, should have trodden on some toes in the Gulf. But not everyone is dissatisfied with Moody’s, which is the world’s oldest and, along with S&P, the most prestigious ratings agency.
‘We’re very happy with our ratings because they fall in line with the top banks in the Gulf, though I feel these types of banks should be rated higher than D-plus,’ says Yeshwant Desai, managing director of Bank Muscat Al-Ahli Al-Omani, which got a D-plus for financial strength.
The other agencies are proceeding carefully in the Gulf. IBCA says it has a policy of not giving unsolicited ratings to states or financial institutions. S&P, Thomson BankWatch and Capital Intelligence are all keen to stress their interest in building longterm relationships with banks. ‘One wants to establish relationships. Ratings can be controversial in a part of the world where in the past they have not always been wellapplied,’ says George Dallas, head of S&P’s European region which also covers the Middle East.
‘This is an area of the world where they’re not used to this kind of scrutiny from international institutions,’ comments William Hassiepen, vice-president and Middle East manager of Thomson BankWatch. ‘Banks are not opposed to being rated, but they are still trying to understand why they need a rating.’
The mixed reception given to Moody’s raises the question whether or not Gulf banks actually need ratings at all. Bond issues have been the traditional bread and butter of the ratings industry, but few Gulf banks are issuers of debt. The main reason a bank might seek a credit rating is to make it easier to borrow on the interbank market, but many Gulf banks can meet their funding needs from local sources.
‘If you’re talking in terms of debt issues on the capital markets, there are probably more investors than borrowers,’ says Lionel Marsland-Shaw, general manager of Capital Intelligence. ‘I haven’t been conscious of a general demand for capital, though some banks are going more now to the capital markets.’
‘Look at our banks,’ says a senior executive at a bank in Saudi Arabia. ‘We don’t issue bonds so we don’t need long-term ratings. We’re not net borrowers from the interbank market, we’re net lenders. I don’t see what all the fuss is about.’
The demand for ratings comes mainly from the agencies’ subscribers worldwide, notably correspondent banks and exporters. ‘The pressure is coming mostly from our exporting clients. The Gulf is the main export market for the US in the Middle East,’ says Hassiepen at Thomson BankWatch.
‘By and large it’s driven from outside. But it’s not just from investors or the interbank market,’ says Jackson-Moore of Moody’s. ‘There are clearly diverse feelings within the region. Some people want ratings.’
Another factor in the spread of ratings over the Gulf is the agencies desire to extend their global reach. ‘We have a strategy to cover the world with ratings,’ says Jackson-Moore. Notes Dallas at S&P: ‘People like our ratings and they like S&P. But they want to see broader coverage.’
Straightforward competition between agencies to establish themselves in a new market may also be a factor. ‘There are only a handful of operators in this field. When one does something, everyone else is going to do it,’ suggests the Saudi-based banker.
The advent of the US and European agencies poses a challenge for Capital Intelligence, which also covers east and South-East Asia and previously had much of the Middle East to itself. In the face of competition from other agencies, CI’s strength may prove to be local bankers’ perceptions that it knows the region. ‘We’re strongly enough established to hold our ground for a while,’ says Marsland-Shaw.
There are a number of reasons why an increasing number of banks, particularly larger ones, may come round to the attractions of being rated. A strong incentive is that central banks in the Gulf states seem to favour ratings as a way of promoting greater transparency within their jurisdictions.
Kuwait went for a rating from IBCA in January in order to encourage domestic banks to follow suit. Not all the Gulf states welcome such close foreign inspection of their finances, however. It is noticeable that Thomson BankWatch rated banks in both Saudi Arabia and Qatar, but only assigned a sovereign ceiling for Qatar.
There can be business advantages for a bank which gets a good rating from one of the global agencies:
Even if a bank is not a major or long-term borrower on the interbank market, a rating can help a bank meet its short-term funding needs. ‘US banks use ratings a lot to determine what kind of credit lines to agree and sometimes what amount,’ says Hassiepen.
A rating can give a bank international visibility and make its name known to potential customers or partners. Moody’s and S&P in particular are old and prestigious names in banking. ‘If you have a reasonable rating, you get unsolicited calls from overseas. We’ve had a couple already,’ says an executive at a Kuwaiti bank.
Ratings can be a useful tool for bank executives in assessing how the bank compares to other institutions worldwide. They also provide a benchmark for foreign investors looking at a particular country, such as Oman. ‘As the sultanate develops, there is a growing need for banks to be judged against others in the region and internationally,’ says National Bank of Oman (NBO) general manager Aubyn Hill.
The capital markets of the Middle East are still at an early stage of evolution and the need for ratings will grow as they expand, and economic liberalisation advances. As the borrowing requirements of governments and companies in the region grow, ratings will enable potential investors to evaluate debt issues and institutions more accurately. But no-one expects rapid change.
‘The main interest (in ratings) is in a generic counterparty context, looking at short-term credit, certificate of deposit issues and arranging money market lines. Slowly and surely, there will be more bond issuance.’ says S&P’s Dallas.
‘It is difficult to predict how quickly the level of bond issuance by Middle Eastern states and corporates will grow. However, it is already happening and there seems no reason why the pace should not accelerate as sovereigns and corporates seek to reduce their funding costs,’ says Jackson-Moore of Moody’s.
IBCA has helped to set up the Inter-Arab Ratings Company, which will develop local ratings within domestic markets across the Middle East. ‘We expect development to be slow. In terms of international as opposed to domestic ratings we expect progress to be more rapid in the Gulf. Penetration of the Saudi market is, however, unlikely to be easy,’ says senior IBCA analyst Gerry Rawcliffe.
‘There is a need for rating of financial institutions in the Gulf,’ says Farouky of GIB. ‘If a bank wants to be known for counter-party finance, it will need a rating.’ But both banks and ratings agencies will have to understand each others’ attitudes before the whole process works smoothly. ‘Both sides have to come up the learning curve.’