Gulf banks should issue more medium-term liability instruments to match the likely growth in demand for finance of such maturity, Moody's Investors Service analysts said in London on 11 May. Liquidity deficiency and the need for greater attention to the riskiness of assets are also among issues facing the region's banks, despite the fact that GCC governments are expected to support any bank experiencing serious difficulties, they added.

Moody's sovereign risk senior analyst David Larson said that he did not expect to see a significant increase in the near future in the sovereign ceilings issued to Gulf banks in 1996. 'There is not much prospect for a major increase in government revenue,' he said. 'And we see steady pressure on government expenditure. The adjustments that have been made have tended to affect capital spending.' Larson acknowledged that progress had been made in 1996 in correcting financial trends in the six GCC states, but that this was '80 per cent' due to higher oil prices. The only country in the region likely to enjoy an upgrade soon was the UAE. Moody's has issued a sovereign rating of Baa1 for the federation, joint highest among the six with Kuwait.

Moody's vice-president and Gulf bank specialist Andrew Cunningham said that the agency had rated 37 Gulf banks, equivalent to 85 per cent of those with assets of more than $1,000 million. 'There is an increased demand for medium-term finance and no corresponding development of medium- term liability instruments,' he said. 'We identify the development of medium-term liability instruments as the most pressing need.'

Cunningham also said that a 12 per cent capital/asset ratio was now the industry standard in the Gulf. 'While we welcome strong capitalisation, we think it is very important for banks to think about their capitalisation rather than simply adhere to a number imposed by the central bank,' he said. 'We like banks to think about risks on their balance sheets and about the appropriate level of capitalisation.' Cunningham said the number of Gulf banks rated by Moody's will rise.

In ratings issued so far, only Gulf International Bank (GIB) has been given a grade higher than the sovereign ceiling for the country in which it is based. This is because offshore banks are less likely to be affected by transfer risk than onshore banks in Bahrain, Cunningham said.

Bank financial strength ratings, Moody's guide to the intrinsic strength of individual banks, of C+-E+ have been issued to Gulf banks. This is significantly below the average for the rest of the world. Cunningham said that the ratings for Gulf banks, no matter how well-managed, will be affected by the limited size and sophistication of regional banking and capital markets.